MBA FPX 5010 Assessment 3

Executive Summary

Ace Company requires new production houses and software pertaining to them. They have come to us for a loan of $3 million with a ten-year fixed rate of interest. To find out whether they are eligible for it or not, I will analyze the financial records and previous years’ and current year’s performance records of Ace Company. This will lead to a loan recommendation to assist the management team in making the ultimate decision on whether the company is eligible for the loan or not.

MBA FPX 5010 Assessment 3:Accounts Receivable

Accounts receivable are amounts owed by customers who have purchased merchandise on credit with the aim of paying within a specific time or upon billing by Main Street Store Inc. (David, 2021, p. 33). The 2016 and 2017 balance sheets and income statements were utilized for analysis. From Ace Company’s balance sheet, asset growth in accounts receivables is extremely minimal, posting a 3% increase from $3,900 in 2016 to $4,000 in 2017. This is indicative that Ace Company is not maximizing profits by utilizing its assets effectively. The lack of profit growth can be attributed to the accounts receivable turnover ratio, which increased slightly from 4.68 times in 2016 to 5.06 times in 2017. This rate of turnover suggests that the company is not efficient in collecting payments from its customers.

Inventory Turnover

Inventory turnover is a significant indicator of how frequently a company replenishes its inventory based on sales over a year or quarter. The current industry average for inventory turnover ratios is 5 to 10 times per year for firms with high sales. The inventory turnover ratio for Ace Company is 1.82 times in 2017, which is lower than 1.94 times in 2016. This is much lower than the industry average. Fuhrmann (2021) states that “a higher inventory turnover ratio is preferable, as it indicates more sales from a given amount of inventory.” But an extremely high ratio will result in lost sales if inventory to satisfy demand is insufficient. Ace Company is also beginning to exhibit negative trends in pricing and net profit margins at the expense of its inventory turnover.

Short-term and Long-term Creditworthiness

In determining the creditworthiness of Ace Company, we will look at the debt-to-equity ratio to see what the company’s asset-to-debt ratio is. Ace’s debt-to-equity ratio is 2.49 in 2017, down from 3.78, indicating a positive trend of reducing debt, though it is risky when compared with the nation’s average. The company’s financial ratios in the current time have been improving, from 1.53 to 1.79, indicating short-term creditworthiness is not possible now. Further, the company’s interest coverage ratio indicates lesser risk due to a good (TIE) ratio.

Recommendation

Based on the audited financial reports, granting of the requested loan of $3 million for a period of ten years to Ace Company is an enormous risk under the current deficiency in inventory turnover and weak accounts receivable collections. Despite any potential growth in the future, the current financial position does not warrant approval of the loan.