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.
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Creek Enterprises Income Statement for the Year Ended December 31, 2006
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Sales revenue
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$30,000,000
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Less: Cost of goods sold
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21,000,000
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Gross profits
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$ 9,000,000
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Less: Operating expenses
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Selling expense
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$3,000,000
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General and administrative expenses
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1,800,000
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Lease expense
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200,000
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Creek Enterprises Income Statement for the Year Ended December 31, 2006
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Depreciation expense
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1,000,000
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Total operating expense
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6,000,000
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Operating profits
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$ 3,000,000
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Less: Interest expense
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1,000,000
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Net profits before taxes
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$ 2,000,000
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Less: Taxes (rate = 40%)
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800,000
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Net profits after taxes
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$ 1,200,000
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Less: Preferred stock dividends
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100,000
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Earnings available for common stockholders
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$ 1,100,000
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Creek Enterprises Balance Sheet December 31, 2006
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Assets
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Liabilities and Stockholders' Equity
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Current assets
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Current liabilities
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Cash
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$ 1,000,000
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Accounts payable
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$ 8,000,000
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Marketable securities
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3,000,000
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Notes payable
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8,000,000
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Accounts receivable
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12,000,000
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Accruals
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500,000
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Inventories
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7,500,000
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Total current liabilities
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$16,500,000
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Total current assets
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$23,500,000
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Long-term debt (includes financial leases)b
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$20,000,000
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Gross fixed assets (at cost)a
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Stockholders' equity
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Land and buildings
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$11,000,000
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Preferred stock (25,000 shares,
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$ 2,500,000
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