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Analyzing financial statement using ratio analysis.
Springfield Bank is evaluating Creek Enterprises, which has requested a $4,000,000 loan, to assess the firm's financial leverage and financial risk. On the basis of the debt ratios for Creek, along with the industry averages and Creek's recent financial statements (on the facing page), evaluate and recommend appropriate action on the loan request.
Creek Enterprises Income Statement for the Year Ended December 31, 2006
Sales revenue
$30,000,000
Less: Cost of goods sold
21,000,000
Gross profits
$ 9,000,000
Less: Operating expenses
Selling expense
$3,000,000
General and administrative expenses
1,800,000
Lease expense
200,000
Depreciation expense
1,000,000
Total operating expense
6,000,000
Operating profits
$ 3,000,000
Less: Interest expense
Net profits before taxes
$ 2,000,000
Less: Taxes (rate = 40%)
800,000
Net profits after taxes
$ 1,200,000
Less: Preferred stock dividends
100,000
Earnings available for common stockholders
$ 1,100,000
Creek Enterprises Balance Sheet December 31, 2006
Assets
Liabilities and Stockholders' Equity
Current assets
Current liabilities
Cash
$ 1,000,000
Accounts payable
$ 8,000,000
Marketable securities
3,000,000
Notes payable
8,000,000
Accounts receivable
12,000,000
Accruals
500,000
Inventories
7,500,000
Total current liabilities
$16,500,000
Total current assets
$23,500,000
Long-term debt (includes financial leases)b
$20,000,000
Gross fixed assets (at cost)a
Stockholders' equity
Land and buildings
$11,000,000
Preferred stock (25,000 shares,
$ 2,500,000
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