The Suitable Credit Product to Mark Equipment Pty Limited - Essay Example

? Banking  Table of Contents Question 2 3 Evaluation of Client 3 Financial ment Analysis 3 Nature of Business and Bank Reference 6 Credit Products to be Offered 7 Question 5 7 References 9 Question 2 Evaluation of Client The determination of the suitable credit product to be offered to Mr. Mark Angelo and his company Mark Equipment Pty Ltd. necessitates the credit assessment of Mr. Mark Angelo and his company. The collected financial information have to be analyzed in order to examine the ability of the client, Mr. Mark Angelo, to repay the debt as well as his net asset value, in addition to the assets which Mr. Mark Angelo can offer to the bank as security against the debt1. Financial Statement Analysis The financial statement analysis of Mark Equipment Pty Ltd for the present and the past year reveals the following ratios: Ratios   Present Year   Previous Year Current Assets 36733500 13119000 Current Liabilities 27323300 10237700 Current Ratio   1.344402031   1.281440167 Total Quick Assets 27442400 5642100 Current Liabilities 27323300 10237700 Quick ratio   1.004358917   0.551110113 Total Cash Assets 53200 42400 Current Liabilities 27323300 10237700 Cash Ratio   0.001947056   0.004141555 Total Debt 2961200 1550000 Total Stockholders' Equity 13706800 8668300 Debt to Equity   0.216038754   0.178812455 Gross Profit 34017900 22435000 Revenues 159697500 107043200 Gross Profit Margin (%)   21.30%   20.96% Profit for the Year Attributable to Owners 24300 183000 Revenues 159697500 107043200 Net Profit Margin (%)   0.02%   0.17% Profit for the Year Attributable to Owners 24300 183000 Total Stockholders' Equity 13706800 8668300 ROE (%)   0.18%   2.11% Profit for the Year Attributable to Owners 24300 183000 Total Assets 43991300 20456000 ROA (%)   0.06%   0.89% Revenues 159697500 107043200 Inventory 9291100 7476900 Inventory Turnover   17.18822314   14.31652155 Revenues 159697500 107043200 Fixed Assets 7093500 5921600 Net Fixed Asset Turnover   22.51321632   18.07673602 Revenues 159697500 107043200 Total Assets 43991300 20456000 Total Asset Turnover   3.630206427   5.232850997 Revenues 159697500 107043200 Total Stockholders' Equity 13706800 8668300 Equity Turnover   11.65096886   12.34881119 The examination of the short-term liquidity of an organization can be accomplished through the current ratio, quick ratio and the cash ratio of the organization. The current ratio signifies the organization’s capability to meet its current liabilities and obligations comfortably. The quick ratio exhibits the capacity to meet the urgent liabilities. The cash ratio is beneficial for creditors to determine how quickly the organization can pay off its short-term debt2. In this context, it can be observed that the company’s liquidity position had improved from that of the previous year, but it would be preferable if Mark Equipment Pty Ltd could increase the percentage of their current assets. The solvency of an organization can be evaluated through the debt to equity ratio. The debt to equity ratio signifies the amount of assets that were financed by debt relative to the amount financed by equity3. Thus, Mark Equipment Pty Ltd had utilized comparatively lesser amount to debt to finance its assets and is less financially leveraged. The profitability of the company as indicated by the net profit margin and the return of equity as well as that on assets is very low. Therefore, it can be inferred that the company had not utilized its assets and equity proficiently4. In contrast the gross profit margin of the company is very high, implying that the company’s operating expenses are elevated. The fixed asset turnover ratio of the company indicates that it generates fairly decent value of revenue per unit currency of its fixed assets5. However, the total asset and the equity turnover ratios of the company are relatively low and have also decreased from the previous year. Consequently, the financial analysis reveals that though the company possesses decent values of revenue as well as gross profit and the values had increased since the last year, the company had not paid any dividends since the last year and its net profit is also very low. Furthermore, the company holds an unsecured loan of $4,500,000 at the rate of 10% as well as floating current account loans of $6,151,600, in addition to a contingent liability worth $5,000,000 as of the present year. Nevertheless, the net asset value of the company as of the present year had increased by around 58% from the previous year and had amounted to $13,706,800. The company also possesses fixed assets worth $7093500, which it can offer as collateral against any credit product from the bank. The financial leverage factor of the company, which can be computed as the ratio of its ROE to its ROA is 3. This indicates that the company had not used too much of credit capital and can comfortably take up a loan if required. The analysis of the balance sheet of Mr. Mark Angelo reveals that his net asset value is worth $17,173,400. In addition to this, Mark Angelo also earns a salary worth $600,000 per month from Mark Equipment Pty Ltd. He also owns properties worth $27,660,000, against which he had taken debts worth $18,500,000 till date. The properties owned by Mark Angelo can act as collaterals for any form of credit facilities from the bank. Nature of Business and Bank Reference Moreover, Mark Equipment Pty Ltd operates as an engineering plant that manufactures specialised parts for the transport and vehicle industry, which is an expanding industry. The information enclosed in the three month bank statements from the current bank of Mark Angelo illustrates that the account had a turnover of $2,100,435 over the three months. The client has an overdraft facility of $50,000 at the rate of 9.5% from his existing bank and had faced no instances of default so far. Credit Products to be Offered Considering the low financial leverage of Mark Equipment Pty Ltd, the value of the collaterals that the company can offer to the bank and the growth potential of the transport and vehicle industry, the company can be offered fund based credit products or even non-fund based credit products such as a bank guarantee if it wishes to take up certain specific projects that necessitates a guarantee. The fund based credit services could be working capital finance in the form of cash credit, overdraft, demand loans and bill discounted6. Mark Equipment Pty Ltd can also be offered term loans by securing them by mortgage of collaterals in the form of fixed assets of the company. Mr. Mark Angelo can be offered a personal loan or a credit card facility, considering his stable financial condition7. Question 5 Assuming that Mark Equipment Pty Ltd takes up a loan of $10,000,000 at the interest rate of 14.5% over a period of 10 years, the company would have to pay equated monthly installments every month for ten years to repay the interest and the principal amount of the loan. The loan amortization table (Refer Appendices) indicates that the company would have to pay an amount of $158,286.79 every month of the subsequent 10 years8. If the company utilizes the loan for the replacement of redundant equipments, then the loan would not increase the production capacity of the company or the sales of its products. Therefore, Mark Equipment Pty Ltd would have to arrange for the equated monthly installment worth $158,286.79 for the next 120 months on the basis of their existing production and sales capability. The study of the income statements or the statements of financial performance of Mark Equipment Pty Ltd for this year and the previous year reveals that the yearly net earnings of the company is very low to accommodate the monthly repayments of the $10 million loan. The distributable reserves as per the statement of financial position of Mark Equipment Pty Ltd are also not enough to adjust the loan repayment. However, Mark Angelo’s monthly salary and other fringe benefits from Mark Equipment Pty Ltd, as stated by his auditor is $600,000. Since, Mr. Mark Angelo owns 50% shares in the Mark Equipment Pty Ltd, relying on his individual monthly salary; the company would have the ability to repay the additional loan of $10 million comfortably. References Altman, Edward, I. 1968. Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy. Journal of Finance, 23(4): 589-609. Damodaran, A., No Date. “Financial Statement Analysis”. “New York University”. http://people.stern.nyu.edu/adamodar/pdfiles/invphiloh/finstatement.pdf Gitman, L. J. Principles of Managerial Finance. India: Pearson Education, 2007. James Madison University, 2010. “Financial Ratio Analysis”. “Financial Analysis”. http://educ.jmu.edu/~drakepp/principles/module2/fin_rat.pdf Khan, M. Y. Financial Services. India: Tata McGraw-Hill Education, 1996. Koch, Timothy W. & MacDonald, S Scott. Bank Management. USA: Cengage Learning, 2009. Ross, Stephen A. & Et. Al. Fundamentals of Corporate Finance. India: Tata McGraw-Hill Education, 2008. Woelfel, C. J. Financial Statement Analysis: The Investor's Self-Study Guide to Interpreting & Analyzing Financial Statements. US: McGraw-Hill Professional, 1994. Appendices Read More