Problem 1 – Comprehensive Ratio Analysis You have just been hired as a loan officer at Luzon Bank. Your supervisor has given you a file containing a request from Helix Company, a manufacturer of auto components, for a P1,000,000 five-year loan. Financial statement data on the company for the last two years are given below: (picture below) Meri Ramos, who just two years ago was appointed president of Helix Company, admits that the company has been "inconsistent" in its performance over the past several years. But Ramos argues that the company has its costs under control and is now experiencing strong sales growth, as evidenced by the more than 25% increase in sales over the last year. Ramos also argues that investors have recognized the improving situation at Helix Company, as shown by the jump in the price of its ordinary shares from P20 per share last year to P36 per share this year. Ramos believes that with strong leadership and with the modernized equipment that the P 1,000,000 loan will permit the company to buy, profits will be even stronger in the future. Anxious to impress your supervisor, you decide to generate all the information you can about the company. You determine that the following ratios are typical of companies in Helix's industry: Current ratio 2.3 to 1 Acid-test ratio 1.2 to 1 Average age of receivables 31 days Inventory turnover 60 days Return on assets 9.5% Debt-to-equity ratio 0.65 to 1 Times interest earned 5.7 Price-earnings ratio 10 Required: You decide next to assess the well-being of the ordinary shareholders. For both this year and last year, compute: The earnings per share. The dividend yield ratio for ordinary. The dividend payout ratio for ordinary. The price-earnings ratio. How do investors regard Helix Company as compared to other firms in the industry? Explain. The book value per share of ordinary. Does the difference between market value per share and book value per share suggest that the stock at its current price is a bargain? Explain. The gross margin percentage. You decide, finally, to assess creditor ratios to determine both short-term and long-term debt paying ability. For both this year and last year, compute: Working capital. The current ratio. The acid-test ratio. The average age of receivables. (The accounts receivable at the beginning of last year totaled P520,000.) The inventory turnover. (The inventory at the beginning of last year totaled P640,000.) The debt-to-equity ratio. The number of times interest was earned. Evaluate the data computed in (1) to (3) above, and using any additional data provided in the problem, make a recommendation to your supervisor as to whether the loan should be approved.
Problem 1 – Comprehensive Ratio Analysis
You have just been hired as a loan officer at Luzon Bank. Your supervisor has given you a file containing a request from Helix Company, a manufacturer of auto components, for a P1,000,000 five-year loan. Financial statement data on the company for the last two years are given below: (picture below)
Meri Ramos, who just two years ago was appointed president of Helix Company, admits that the company has been "inconsistent" in its performance over the past several years. But Ramos argues that the company has its costs under control and is now experiencing strong sales growth, as evidenced by the more than 25% increase in sales over the last year. Ramos also argues that investors have recognized the improving situation at Helix Company, as shown by the jump in the price of its ordinary shares from P20 per share last year to P36 per share this year. Ramos believes
that with strong leadership and with the modernized equipment that the P 1,000,000 loan will permit the company to buy, profits will be even stronger in the future.
Anxious to impress your supervisor, you decide to generate all the information you can about the company. You determine that the following ratios are typical of companies in Helix's industry:
Acid-test ratio 1.2 to 1
Average age of receivables 31 days
Inventory turnover 60 days
Return on assets 9.5%
Debt-to-equity ratio 0.65 to 1
Times interest earned 5.7
Price-earnings ratio 10
Required:
- You decide next to assess the well-being of the ordinary shareholders. For both this year and last year, compute:
- The earnings per share.
- The dividend yield ratio for ordinary.
- The dividend payout ratio for ordinary.
- The price-earnings ratio. How do investors regard Helix Company as compared to other firms in the industry? Explain.
- The book value per share of ordinary. Does the difference between market value per share and book value per share suggest that the stock at its current price is a bargain? Explain.
- The gross margin percentage.
- You decide, finally, to assess creditor ratios to determine both short-term and long-term debt paying ability. For both this year and last year, compute:
Working capital .- The current ratio.
- The acid-test ratio.
- The average age of receivables. (The accounts receivable at the beginning of last year totaled P520,000.)
- The inventory turnover. (The inventory at the beginning of last year totaled P640,000.)
- The debt-to-equity ratio.
- The number of times interest was earned.
- Evaluate the data computed in (1) to (3) above, and using any additional data provided in the problem, make a recommendation to your supervisor as to whether the loan should be approved.
Learn your way
Includes step-by-step video
Step by step
Solved in 4 steps