Financial Institutions are an integral component of financing for many companies and industries today. Especially since many companies are not generating the income that was experienced in the past due to a suppressed economy. It is important for companies to keep accurate current financial records. (Lawrence, 1983) These records become an important part of the loan request package that they submit to the lending institution. Financial institutions rely heavily on the audited financial statements of the companies to reach their lending decisions. (Jones, 1996) The process that is used in financial institutions is credit analysis. Credit analysis is the process used by lenders to decide whether a potential borrower should be permitted to attain a loan. (Lawrence, 1983) The process also determines the amount of the loan. The purpose of the analysis is to determine the probability that a potential borrower will default on the loan and the severity of losses that may be sustained in the event of default. (DeYoung, Evans, Lam and West, 2010) In essence, the analysis process allows lenders to decide the creditworthiness of the business and guarantors. The summation of the process is to determine if the loan can be repaid. (Jones, 1996) The function of the analysis is performed by the Credit Analyst. The analyst is responsible for performing a thorough credit review and assessing the risk to return ratio. (William, 2009). The review includes study of the lending proposal, assessing the risk bearing capacity, analyzing financial statements, predicting trends, studying the repayment record and a host of other tasks. The analyst is the lender and the potential borrower. (Williams, 2009) Companies which supply incomple... ... middle of paper ... ...Works Cited Bangs, David H., Jr. Managing by the Numbers: Financial Essentials for the Growing Business. Upstart Publishing, 1992. Clark, Scott. "You Can Read the Tea Leaves of Financial Ratios." Birmingham Business Journal. February 25, 2000. DeYoung, Robert, Evans, Paul, Lam, Pok sang and West, Kenneth. Journal of Money Credit and Banking Ranking: 2010: Business, Finance: 22 / 74; Economics: 88 / 304 Gill, James O. Financial Basics of Small Business Success. Crisp Publications, 1994. Jones, Allen N. "Financial Statements: When Properly Read, They Share a Wealth of Information." Memphis Business Journal. February 5, 1996. Lawrence C. Galitz, (1983) "Consumer Credit Analysis", Managerial Finance, Vol. 9 Iss: 3/4, pp.27 - 33 Williams, Rachel. “Credit Analyst Jobs.” 2009. Retrieved March 21, 2012 from Isnare: http://www.isnare.com/html.phb?aid=414771
These ratios can be used to determine the most desirable company to grant a loan to between Wendy’s and Bob Evans. Wendy’s has a debt to assets ratio of 34.93% while Bob Evans is 43.68%. When it comes to debt to asset ratios, the company with the lower percentage has the lowest risk. Therefore, Wendy’s is more desirable than Bob Evans. In the area of debt to equity ratios, Wendy’s comes in at 84.31% while Bob Evans comes in at 118.71%. Like debt to assets, a low debt to equity ratio indicates less risk in a company. Again, Wendy’s is the less risky company. Finally, Wendy’s has a times interest earned ratio of 4.86 while Bob Evans owns a 3.78. Unlike the previous two ratios, times interest earned ratio is measured on a scale of 1 to 5. The closer the ratio is to 5, the less risky a company is. From the view of a banker, any ratio over 2.5 is an acceptable risk. Both companies are an acceptable risk, however, Wendy’s is once again more desirable. Based on these findings, Wendy’s is the better choice for banks to loan money to because of the lower level of
Troy, PhD., Leo. Almanac of Business and Industrial Financial Ratios. 30th edt. (1999) (page 159) Paramus, NJ: Prentice Hall.
United States. Federal Reserve Bank of New York. Quarterly Report on Household Debt and Credit. 2013. Web.
Marshall, M.H., McManus, W.W., Viele, V.F. (2003). Accounting: What the Numbers Mean. 6th ed. New York: McGraw-Hill Companies.
In this case analysis I will first show the requirements the company had for its financing. Then I will
The implications of these findings are as follows. The works of these academics highlight the important point that there is higher volatility of capital charges for better quality credits (Goodhart & Taylor, 2004). This is because these credits face a steeper risk curve, as the movement within the ratings scale (from one rating to another) is much greater.
Thesis: Businesses deem financing necessary when they are just beginning, expanding, or recovering; Debt financing and equity financing have many advantages and disadvantages but also change the entire accounting method that is to be considered while running the business. Debt financing has both advantages and disadvantages. Debt financing is a business’ way to start up, expand, or recover by borrowing money from a person or company. The money borrowed has to be paid back along with the interest that was accrued during the length of time the loan was carried out. This option is great for company’s that do not want investors.
Garrison, R. H., Noreen, E. W., & Brewer, P. c. (2010). Managerial Accounting. New York: McGraw Hill/Irwin.
Information on the financial statement can offer an overview of a company’s performance over the past fiscal year. However, gaining crucial investment insights requires financial manipulation that yields financial ratios.
The article Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy was written in 1968 by Edward I. Altman. The purpose of the article is to address the quality of ratio analysis as an analytical technique. At the time, some academicians were moving away from ratio analysis and moving toward statistical analysis. The article attempted to determine if ratio analysis should be continued, eliminated and replaced by statistical analysis or serve together with statistical analysis as cofactors in financial analysis. The example case used in the article was the prediction of corporate bankruptcy.
According to the conceptual framework, the potential users of financial statements are investors, creditors, suppliers, employees, customers, governments and agencies, and the general public (Financial Accounting Standards Board, 2006). The primary users are investors, creditors, and those who advise them. It goes on to define the criteria that make up each potential user, as well as, the limitations of financial reporting. The FASB explicitly states that financial reporting is “but one source of information needed by those who make investment, credit, and similar resource allocation decisions. Users also need to consider pertinent information from other sources, and be aware of the characteristics and limitations of the information in them” (Financial Accounting Standards Board, 2006). With this in mind, it is still particularly difficult to determine whom the financials should be catered towards and what level of prudence is necessary for quality judgment.
Tillman, Vickie, 2007, Don’t Blame the Rating Agencies, The Wall Street Journal, August 31, p. A9.
Ritter, Lawrence R., Silber, William L., Udell, Gregory F. 2000, Money, banking, and Financial Markets, 10th edn, USA.
Access to capital and credit at various stages in the business life cycle is identified as the major hurdle by the entrepreneurs. For many small firms and most start-ups, the personal funds of the business owners and entrepreneur and those of relatives and acquaintances constitute as the major source of capital. For many small businesses, especially during the early years of their operation, credit is simply not available. For many others, the limited available credit is not through bank loans. Due to this many of them rely on multiple credit card balances and home equity loans as major sources of credit for start-up firm. Because banks are bound by laws and regulations to prudent lending standards that require them a risk management assessment for each loan made. These regulations were made more vigor during the late 1980'' and early 1990 . Banks always found that lending to manufacturing firm with hard asset such as property, equipment, and inventory has always been easier than lending to today's expanding service sector firms. Because the service sector firms own few hard asses, therefor lending judgment have to be based in terms of character, markets, and cashflow, which make it difficult to the bank to meet the regulations for the approval of the loan. Additional, the banking industry, as well as the entire financial sector of the
Any successful business owner or investor is constantly evaluating the performance of the companies they are involved with, comparing historical figures with its industry competitors, and even with successful businesses from other industries. To complete a thorough examination of any company's effectiveness, however, more needs to be looked at than the easily attainable numbers like sales, profits, and total assets. Luckily, there are many well-tested ratios out there that make the task a bit less daunting. Financial ratio analysis helps identify and quantify a company's strengths and weaknesses, evaluate its financial position, and shows potential risks. As with any other form of analysis, financial ratios aren't definitive and their results shouldn't be viewed as the only possibilities. However, when used in conjuncture with various other business evaluation processes, financial ratios are invaluable. By examining Ford Motor Company's financial ratios, along with a few other company factors, this report will give a clear picture of how the company is doing now and should do in the future.