Refer to the financial data for the Bao Corporation in Problem 14-1 3.You have just been hired as a loan officer at the Sussex Bank Your supervisor has given you a file containing a request from Bao Corporation for a $30,000 five-year loan. Use the financial statements for the Bao Corporation to answer the questions that follow.
Lui Chun, who just a year ago was appointed president of Bao Corporation, informs you that although the company has had some problems in the past, it is turning things around, as evidenced by the 17 percent increase in sales and the improved earnings results between last year and this year. Ms. Chun feels that, with her leadership and the improved technology (which will come from the equipment that the $30,000 will allow the company to purchase), profits will be even stronger in the future.Wanting to succeed in your first assignment, you decide to gather all the necessary information for a complete analysis. You determine that the following ratios are typical for the industry in which Bao Corporation operates:
Current ratio .............2.6 to 1
Acid-test (quick) ratio........1.2 to 1
Accounts receivable turnover.......8.5 times
Inventory turnover .........6.2 times
Return on assets ..........12.1%
Debt-to-equity ratio .........0.68 to 1
Times interest earned.........6.8
Required:
a. Compute each of the above ratios for Bao Corporation.
b. Summarize the results of these ratios.
c. Based on this analysis, would you recommend that the loan be approved?