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.