Gale & Co. has applied for a loan from the Trust Us Bank in order to invest in s
ID: 2619484 • Letter: G
Question
Gale & Co. has applied for a loan from the Trust Us Bank in order to invest in
several potential opportunities. In order to evaluate the firm as a potential debtor, the bank would like to compare Gale & Co. to the industry. The following are some key financial ratios
2016 2017 Industry Norm(2017)
Current Ratio 4.3X 5.7X 5.0X
Quick Ratio 2.1X 2.8X 3.0X
Inventory Turnover 1.0X 1.3X 2.2X
Average Collection Period 90days 78.3days 90days
Debt Ratio 33% 28% 33%
Times Interest Earned 5.0X 6.0X 7.0X
Total Asset Turnover .46X .54X .76X
Fixed Asset Turnover .92X .99X 1.0X
Operating Profit Margin 29.1% 25.6% 20%
Net Profit Margin 12.0% 14.6% 16.3%
Return on Total Assets 7.1% 7.5% 9.0%
Basic Earning Power Ratio 13.4% 13.7% 15.0%
Return on Equity 10.6% 10.4% 13.4%
What are the firm’s financial strengths and weaknesses? Should the bank make the loan? Why or why not?
Explanation / Answer
The firm's financial strength are current ratio, Debt ratio, operating profit margin which are more than industry average. Expect Operating profit margin and ROE all the ratios have improved from 2016 to 2017.
Weakness of the firm are Inventory turnover which if improved can increase the profitability, times interest earned, total assets turnover which if improved can increase ROE, These ratios are below industry average even though they have increased from previous year.
The banks should give the loan give the ratios have improved from 2016 to 2017. Its debt ratio has reducd making the firm less risky than industry and also the times interest earned has also increased. So the repaying capacity of firm has increased even though it is less than industry average.
Best of Luck. God Bless
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