Executive Summary
MBA FPX 5010 Assessment 3 Ace Company requires new manufacturing facilities and software pertaining to it. They have come to us for a $3 million loan for ten years at a fixed rate of interest. To check whether they are eligible for this loan, I will analyze the financial statements and performance history of Ace Company in the past years as well as the current year. This will guide a loan recommendation to help the management team make the final decision on whether the company qualifies for the loan or not.
Accounts Receivable
Accounts receivable are amounts due from customers who have bought merchandise on credit with the intention of paying within a definite period or upon billing by Main Street Store Inc. (David, 2021, p. 33). The income statement and balance sheet of the 2016 and 2017 periods were employed in analyzing. From Ace Company’s balance sheet, the increase in assets in accounts receivables is minuscule, with a 3% increase from $3,900 in 2016 to $4,000 in 2017. This indicates that Ace Company is inefficient in utilizing its assets to ensure maximum profits. 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 shows that the company is not efficient in collecting payments from its customers.
Inventory Turnover
Inventory turnover is an important measure of how often a company restocks its inventory on the basis of sales during a year or quarter. The industry average for inventory turnover rates today is between 5 to 10 times a year for companies that have high sales. The inventory turnover rate for Ace Company is 1.82 times in 2017, down from 1.94 times in 2016. This is far below the industry average. According to Fuhrmann (2021), “A higher inventory turnover ratio is preferable as it indicates more sales from a given amount of inventory.”. But a very high ratio will cause lost sales if inventory to meet demand is not enough. Ace Company is also starting to show negative trends in pricing and net profit margins, to the detriment of its inventory turnover.
Short-term and Long-term Credit Worthiness
While assessing the creditworthiness of Ace Company, we shall analyze the debt-to-equity ratio to get an insight into the company’s asset-to-debt ratio. Ace’s debt-to-equity ratio is 2.49 in 2017, down from 3.78, illustrating the positive trend of reducing debt, but it is a risk when compared to the nation’s average. The financial ratios of the company have improved currently from 1.53 to 1.79, so short-term creditworthiness is not currently possible. Besides, the interest coverage ratio of the company indicates lower risk due to an effective (TIE) ratio.
Recommendation
MBA FPX 5010 Assessment 3 Based on the examined financial reports, granting the requested $3 million ten-year loan to Ace Company poses a great risk with the existing absence of inventory turnover and weak collection of accounts receivable. Despite some possibility of growth in the future, the current financial position does not support granting the loan.
| Appendix | Calculation Formula | 2017 Calculation | 2016 Calculation |
| Accounts Receivable | Net Sales / Accounts Receivable = Ratio | 20,000 / ((4,000 + 3,900) / 2) = 5.06 times | 18,000 / (($3,900 + $3,800) / 2) = 4.68 times |
| Average Inventory Turnover | Cost of Goods Sold / Inventory = Inventory Turnover Ratio | 10,000 / ((6,000 + 5,000) / 2) = 1.82 times | 9,500 / (($5,000 + $4,800) / 2) = 1.94 times |
References
David, M. (2021). Accounting, What the Numbers Mean (12th ed.). https://capella.vitalsource.com/#/books/9781260480719/cfi/6/28!/4/2/12/10/30/2/2/2/2/2
MBA FPX 5010 Assessment 3 Performance Evaluation – Ace Company
Fuhrmann, R. (2021). Investopedia. https://www.investopedia.com/ask/answers/070914/howdo-i-calculate-inventory-turnover-ratio.asp#:
