Reference no: EM13484165 , Length: 30

Renbud Computer Services Co. (RCS) specializes in customized software development for the broadcast and telecommunications industries. The company was started by three people to develop software primarily for a national network to be used in broadcasting national election results. After sustained and manageable growth for many years. the company has grown very fast over the last three years, doubling in size.

This growth has placed the company in a challenging financial position. Within thirty days, RCS will need to renew its $300,000 loan with the Third State Bank of San Marcos. This loan is classified as a current liability on RCS's balance sheet. Harvey Renbud, president of RCS, is concerned about renewing the loan. The bank has requested RCS's most recent financial statements which appear below, including balance sheets for this year and last year. The bank has also requested four ratios relating to operating performance and liquidity.

Renbud Computer Services Co. Income Statement

For the Year Ended December 31

(in thousands)

Sales		$2,500
Expenses:
Cost of services provided	$l,500
Selling and administrative	300
Depreciation and amortization	200
Interest	60
Income taxes	150
Total expenses		2,210
Net income		$ 290

Renbud Computer Services Co. Balance Sheets

December 31

(in thousands)

	This Year	Last Year
Assets
Cash	$ 50	$ 50
Accounts receivable, net	350	250
Other current assets	70	160
Equipment, net	1,100	800
Furniture and fixtures. net	120	100
Other noncurrent assets	240	200
Total assets	$1,930	$1,560

Liabilities and stockholders' equity

Accounts payable	$ 150	$ 130
Taxes payable	140	120
Note payable (Third State Bank)	300	200
Bonds payable (due in seven years)	400	400
Total liabilities	990	850
Capital stock (1,000 shares)	100	100
Retained earnings	840	610
Total stockholders' equity	940	710
Total liabilities and stockholders' equity	$1,930	$1,560

Required:

a. Explain why the Third State Bank of San Marcos would be interested in reviewing Renbud Computer Services Co.'s comparative financial statements and its financial ratios before renewing the loan.

b. Calculate the following financial ratios for Renbud Computer Services Co.:

1. The current ratio for both this year and last year.

2. Accounts receivable turnover for this year.

3. Return on common stockholders equity for this year.

4. The debt-to-equity ratio for both this year and last year.

c. Discuss briefly the limitations and difficulties that can be encountered in using ratio analysis.