Michaela Wall

April 3, 2018

Case #35

Mark X Company is having trouble with their financials and their bank is deciding whether to
loan an extra $6,375,000 or to call back all current loans. To make this decision many ratios have been
compared to the industry average. The current ratio includes current assets and current liabilities. The
current ratio of the company for 1993 and 1994 the firm is below the industry average but has increased
since 1993. Quick ratios include current assets, inventory, and current liabilities. The firm is above the
industry average in their quick ratio and has been since 1993. When looking at these two ratios the
quick ratio would be preferred because it also includes inventory in the ratio.

The debt ratio of the firm is above the industry average, which will negatively affect the
decision. The debt ratio includes total liabilities and total assets. This ratio could be brought to industry
average if any account under total liabilities were lowered or if any account under total assets were
increased. This ratio is important because it measures the extent of a company’s leverage. Another very
important ratio the bank will look at is the times interest earned ratio. This ratio is used to measure the
firm’s ability to meet its debt obligations. This ratio has not met the industry average for the past four
years but has been increasing since 1993.

The inventory turnover ratio has been equal to the industry average for 1993 and 1994. This is
an important thing to look at when looking at a firm because it calculates how long it takes to turn
inventory into cash. Looking at the profitability ratios the firm is projected to do very well in 1994. All of
these ratios are projected to be below the industry average in 1993 but with them being above the
industry average in 1994 this would be a positive thing for the bank to look at for their decision. These
ratio calculations are shown below in Table 1. The numbers highlighted in green are equal to or greater
than the industry average while the numbers in red are less than the industry average.
Table 1

1990 1991 1992 1993 1994 Industry Average

Current ratios 3.07 2.68 1.75 1.73 1.95 2.50
Quick ratios 1.66 1.08 0.73 1.10 1.29 1.00
Debt ratios 40.47% 46.33% 59.80% 57.92% 52.69% 50.00%

TIE coverage 13.92 7.04 1.42 3.48 6.38 7.7

Inventory turnover 7.27 4.59 3.58 5.70 5.70 5.70
Profit margin 5.50% 3.44% 0.39% 2.83% 5.32% 2.90%
Gross profit margin 19.48% 17.82% 14.76% 17.50% 20.00% 18.00%
Return on total assets 16.83% 8.95% 0.79% 5.74% 10.76% 8.80%
ROE 28.26% 16.68% 1.95% 13.63% 22.75% 17.50%

To look at ways to bring the ratios up to industry average a sensitivity analysis was done on the
debt ratio and the inventory turnover ratio. To bring up the inventory turnover ratio inventory would
have to be decreased in future years. To bring down the debt ratio the mortgage could be decreased in
future years and the cash and marketable securities could be increased in future years. Looking at the
most important ratios that were talked about the bank should loan the firm the new capital and not call
back all the current loans.