Renbud Computer Services Co. (RCS) specializes in customized software development for the broadcast and telecommunications industries. The company was started by three people in 1973 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 $1,500

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 Sheet

December 31

(in thousands)

Assets                                             This Year      Last Year

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.