Provision for Credit Loss It is earnings season and I want you to look into annu

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Provision for Credit Loss It is earnings season and I want you to look into annual report of bank of America and Citigroup. Using the last five years of Bank of America and Citigroup annual report, let us discuss the impact of loan loss provision on earnings per share. Please pay attention to provision for credit loss for both banks, Both banks overbooked profit by taking smaller provision for loan losses, but one bank overbooked Profit more than the other. calculate and graph provision of credit losses over total assets. Financial institutions legally can massage the earnings per share by taking smaller provision for anticipated credit losses over the next quarterly reporting period. Regulator allows the financial institution to set aside 1.25 percent of core capital as provision for loan losses. Which bank overbooked profit? You can answer this question by looking at the ratio of credit provision over total assets. Post your answer in discussion board and write a brief evaluation

Explanation / Answer

Question: Assume there is a well-financed, one-year-old company in the biotech industry that is concentrating on developing chemical-based compounds that are aimed at developing drugs to reduce the effects or onset of Alzheimer’s Disease. What financial information (ratios or otherwise) would you think would be relevant or irrelevant from the viewpoint of possible investors in this company

First of all, this is a research based company wherein the success of the company primarily depends on the amount of research they do. The biotech industry is very much different from other industries. The company shall be able to make monetary gains only on successful invention of the drugs. Hence analysis mostly would be qualitative like their strategies than quantitative.

For qualitative analysis, the most critical factor we need to look at is the Management experience and ability. We also need to look at the number of patents by the company which indeed is a measure of the quality of the researchers. This would be helpful in making the product commercially viable.

For quantitative analysis, the main aspect for an investor will be the quality of financing. Although the company is well financed, we need to look at the ratio of Debt to Equity. This tells if the company is sufficiently funded for its short term requirements. Since the company is in development stage, we also should check the other sources of revenue for the company if any ir is it solely for one drug. Having more drugs in pipeline shall reduce the risk involved in the company as single concentration increases the risk in case of failure of the product.

If the company has other products then the ratio of R&D expense/Net Sales shall be taken for qualitative analysis. This can be compared with other companies in the industry to analyze the health of the organization.

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