The t. p. jarmon company manufactures and sells a line of exclusive sportswear. the firm’s sales were $600,000 for the year just ended, and its total assets exceeded $400,000. the company was started by mr. jarmon just 10 years ago and has been profitable every year since its inception. the chief financial officer for the firm, brent vehlim, has decided to seek a line of credit from the firm’s bank totaling $80,000. in the past, the company has relied on its suppliers to finance a large part of its needs for inventory. however, in recent months tight money conditions have led the firm’s suppliers to offer sizable cash discounts to speed up payments for purchases. mr. vehlim wants to use the line of credit to supplant a large portion of the firm’s payables during the summer, which is the firm’s peak seasonal sales period. the firm’s two most recent balance sheets were presented to the bank in support of its loan request. in addition, the firm’s income statement for the year just ended was provided. these statements are found in the following tables:
t. p. jarmon company balance sheets for 12/31/2012 and 12/31/2013
2012 2013
cash 15,000 14,000
marketable securities 6,000 6,200
accounts receivable 42,000 33,000
inventory 51,000 84,000
prepaid rent 1,200 1,100
total current assets 115,200 138,300
net plant and equipment 286,000 270,000
total assets 401,200 408,300
accounts payable 48,000 57,000
notes payable 15,000 13,000
accruals 6,000 5,000
total current liabilities 69,000 75,000
long term debt 160,000 150,000
common stockholders equity 172,200 183,300
total liabilities and equity 401,200 408,300
t. p. jarmon company balance sheets
income statement for 2013
sales(all credit) 600,000
less cost of goods sold 460,000
gross profit 140,000
less operating and interest expenses 0 0
general and administrative 30,000
interest 10,000
depreciation 30,000
total 70,000
earnings before taxes 70,000
less taxes 27,100
net income available to common stockholders 42,900
less cash dividents 31,800
change inretained earnings 11,100
jan fama, associate credit analyst for the merchants national bank of midland, michigan, was assigned the task of analyzing jarmon’s loan request.
a. calculate the following financial ratios for 2013:
ratio norms
current ratio 1.8
acid-test ratio 0.9
debt ratio 0.5
times interest earned 10.0
average collection period 20.0
inventory turnover (based on cost of goods sold) 7.0
return on equity 12.0%
operating return on assets 16.8%
operating profit margin 14.0%
total asset turnover 1.2
fixed asset turnover 1.8
b. which of the ratios calculated in part a do you think should be most crucial in determining whether the bank should extend the line of credit?
c. use the information provided by the financial ratios and industry-norm ratios to decide if you would support making the loan. discuss the basis for yourrecommendation.