ACC week 3 -- 750 words (excluding reference)

The audit of financial statements is important before advancing any loan because the audit is conducted by an independent auditor who checks and examines that the financial statements are prepared fairly and all the reveal the true position of the corporation. The audit report of independent auditor makes the financial statements and other disclosures of the company more credible and dependable. The audited financial statements enable the bankers to ascertain the risk involved in providing loan facility.

Ratios and Trends

Current ratio measures the solvency of the company in paying short-term obligations using its current assets. The current ratio of the P. Jason Corporation has improved significantly from 2.1 in the year 2016 to 3.1 in the year 2017. It is an increasing trend and indicates an improvement in the solvency position of the company. The improvement in ratio is favorable for extending loan facility to P. Jason Corporation.

Asset turnover measures how efficient the business is in utilizing its total assets in generating net revenue. This ratio has also shown an increasing trend and the ratio has improved from 2.2 in the year 2016 to 2.8 in the year 2017. It indicates an increase in the efficiency of the company in utilization of assets and it is a favorable point in providing loan to the company.

The net income of P. Jason Corporation has also improved significantly. During the year 2016 the net income decreased by 8% whereas during the year 2017 the net income increased by 32%. It also shows an increasing trend and suggests that the net income of the corporation is increasing. It is also a favorable point from perspective of providing loan to the corporation.

The earnings per share of the corporation has also increased significantly from $2.50 per share to $3.30 per share. It is the other favorable indication of improvement of financial position of the corporation.

Other Ratios

Following are the other ratios that are also to be calculated to ascertain true financial position of the corporation.

Interest Coverage Ratio

It is the ratio that calculates the ability of the business to pay its interest expense. This ratio is imperative from the bankers point of view as interest on the loans and advances is the reward for the bank and if the ability of the business firm to pay interest expense is low than the money of bank will be at risk.

Debt Ratio

Debt ratio measures the liabilities of the company in relation to its total assets. In other words it determines the ability of the business firm to pay its liabilities from its assets. The company having high debt ratio are considered risky it is presumed that they are having more debts and are also having high burden of fixed interest expense.

Debt to Equity Ratio

This ratio compares the total debts of the company with its equity and calculates the percentage of financing of the company’s capital that comes from investors and from creditors. Ideal debt to equity ratio is 0.50 which means that ideally a company should have one dollar of equity against each 50 cents of debts. If the debt to equity ratio is high it means that the company has taken excessive debts and may find hard to repay them and can also get bankrupt.

Other Imperative Issues

1. Personal information of the persons who are at the helm of affairs of the corporation.

2. Collateral security and its clear title.

3. List of major suppliers and buyers.

4. Project viability report from the analyst.

5. Projected income statement, balance sheet and cash flow for next ten years.

6. Past five year financial statements of the company.

Recommendation

From the above discussion and the available data it is clear that the performance of the company has improved during the last one year. The current ratio, asset turnover, net income and EPS have shown positive improvement and positive numbers. So from the given information it is recommended to approve loan to P. Jason Corporation. But, the information provided is not sufficient to make the decision. The bank should also investigate other ratios and the financial statements of past few years before finalizing the decision.