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Posted: April 12th, 2025
Loan Recommendation for Ace Company: A Financial Analysis
Paper instructions: Write a 1–2 page executive summary, along with an appendix of supporting information, in which you analyze an organization’s financial performance as well as its level of risk for lending and make and present a recommendation to help leadership make a loan decision.
Introduction
This portfolio work project will help you complete a thorough review of an organization’s financial performance as well as its level of risk for lending. Your recommendation will help leadership create a loan portfolio, and your executive summary will clearly and concisely communicate your review to others in the organization.
Scenario
You work for an organization that provides loans to businesses. You are working with a client who is requesting a loan that will require a review of financial and related performance documents. You have been asked to review the documents and summarize your findings in a loan recommendation for your management team.
You may apply this scenario in the Requirements below.
Your Role
You are a loan manager for a lending organization, and your responsibilities include reviewing loan requests and providing recommendations about whether the loan requests should be funded.
Requirements
Your client works for Ace Company. Assume Ace Company requested a $3 million 10-year loan to purchase production equipment and develop accompanying software. Use the Ace Company Data document for this scenario.
Loan Recommendation
To arrive at your recommendation, analyze the financial performance of the requesting company and present it to your organization’s upper-management team. The management team will take your recommendation into consideration as it finalizes loan requests.
Analyze the company’s performance and performance trends. Include the following in your analysis:
Analyze the trend for accounts receivable collections.
Identify the trend.
Explain the relevance of the trend.
Determine if the trend is improving or getting worse.
Compare the company’s average inventory turnover to the industry average inventory turnover rate. Note that the average industry turnover rate for Ace Company is 10 times per year.
Consider whether the company’s average inventory turnover is higher or lower than the industry average.
Explain whether a higher or lower average is better.
Determine whether the trend is improving or getting worse.
Evaluate the company’s short-term and long-term credit worthiness based on financial performance and trend (comparing this year to last year). Include in your evaluation:
Information about performance and trends.
Information about other relevant financial information you consider important to the decision.
Your recommendation regarding whether the bank should grant the loan based on the financial data.
Deliverable Format
The management team of your organization requests this information in the form of a 1–2 page executive summary along with a title page, references page, and appendix of supporting information. The executive summary must highlight the key findings from your review and will provide your recommendation and rationale. The appendix must include data used in your analysis for others to review. Assume that this document is the only communication in regard to your analysis and recommendation and that you will not be with the team to explain anything as it deliberates. In other words, the documentation you provide must be well organized and include information for the management team to clearly see your recommendation and rationale.
Related company report standards:
The executive summary is a professional document and should therefore follow the corresponding MBA Academic and Professional Document Guidelines, including single-spaced paragraphs.
In addition to the executive summary, include:
A title page.
A references page.
Appendix with supporting materials.
Faculty will use the scoring guide to review your recommendation as if they were a member of your organization’s management team. Review the scoring guide prior to developing and submitting your assessment.
ePortfolio
This portfolio work project demonstrates your competency in applying knowledge and skills required of an MBA learner in the workplace. Include this in your personal ePortfolio.
Competencies Measured
By successfully completing this assessment, you will demonstrate your proficiency in the following course competencies through corresponding scoring guide criteria:
Competency 1: Explain how accounting concepts and practices impact financial reporting.
Analyze the trend for the company’s accounts receivable collections.
Compare the company’s average inventory turnover ratio to an industry average.
Competency 2: Apply principles of accounting to assess financial performance.
Evaluate the company’s short-term and long-term credit worthiness.
Competency 4: Communicate financial information with multiple stakeholders.
Communicate accounting information clearly.
Scoring Guide
Use the scoring guide to understand how your assessment will be evaluated.
Criterion 1
Analyze the trend for the company’s accounts receivable collections.
Distinguished
Analyzes the trend for accounts receivable collections and explains findings clearly and in sufficient detail that helps managers make a decision.
Criterion 2
Compare the company’s average inventory turnover ratio to an industry average.
Distinguished
Compares the company’s average inventory turnover ratio to the industry average and explains the difference it makes in the company’s financials in detail and with clarity that will help bank managers make a loan decision.
Criterion 3
Evaluate the company’s short-term and long-term credit worthiness.
Distinguished
Evaluates the company’s short- and long-term credit worthiness for this year compared to last year and explains and includes information that will help bank management make a loan decision.
Criterion 4
Communicate accounting information clearly.
Distinguished
Communicates accounting information clearly and engages the reader with the fluidity of expression. There are few if any errors of mechanics, grammar, or style.
_____________________
Title Page
Loan Recommendation for Ace Company: A Financial Analysis
Prepared by: [Your Name]
Date: 11 April 2025
Executive Summary
Ace Company has applied for a $3 million, 10-year loan to acquire production equipment and develop software. A thorough review of the company’s financial statements for 2021 and 2022 reveals a mixed picture of financial health. Positive trends include rising net sales, improved gross profit margins, and stronger earnings per share. However, concerns arise from slower accounts receivable collections, a low inventory turnover compared to the industry average, and a high debt-to-equity ratio. These factors suggest potential risks in liquidity and operational efficiency.
Despite these challenges, Ace Company demonstrates sufficient operating income to cover interest obligations, with a times interest earned ratio of 9.97 in 2022, up from 7.08 in 2021. The company’s ability to generate profit and maintain stable dividends supports its capacity to service new debt. Based on this analysis, I recommend approving the loan, provided Ace Company implements measures to improve inventory management and accelerate receivable collections. The appendix provides detailed financial data to support this recommendation.
Analysis of Financial Performance
Accounts Receivable Collections
The accounts receivable turnover ratio measures how efficiently a company collects payments from customers. For Ace Company, this ratio increased from 4.58 in 2021 to 5.06 in 2022, indicating a slight improvement in collection speed. Specifically, the average collection period dropped from approximately 80 days in 2021 to 72 days in 2022.
While this trend is positive, it raises some concerns. Slower collections compared to industry benchmarks could strain cash flow, particularly for a company seeking additional debt. The improvement suggests better credit management, but the pace remains modest. If this trend continues without further progress, it may hinder the company’s ability to meet short-term obligations.
Inventory Turnover Comparison
Inventory turnover reflects how quickly a company sells its stock. Ace Company’s turnover ratio was 1.92 in 2022, down slightly from 2.0 in 2021. This translates to an average of 190 days to sell inventory in 2022, compared to 183 days in 2021. In contrast, the industry average for Ace Company’s sector is 10 times per year, or roughly 36 days.
A lower turnover than the industry norm is concerning. It suggests inefficiencies in inventory management, potentially tying up capital that could be used elsewhere. A slower turnover also increases the risk of obsolete stock, which could hurt profitability. The slight decline from 2021 to 2022 indicates this issue is not improving, posing a risk for loan repayment if inefficiencies persist.
Creditworthiness Evaluation
To assess Ace Company’s ability to service a $3 million loan, both short-term and long-term financial health must be considered.
Short-Term Creditworthiness: The current ratio, which measures liquidity, fell from 1.68 in 2021 to 1.37 in 2022. This decline reflects a reduction in current assets, particularly cash, relative to liabilities. A ratio below 1.5 may signal challenges in covering short-term debts, especially with slower receivable collections. While not critical, this trend warrants caution.
Long-Term Creditworthiness: The total debt-to-equity ratio improved marginally from 3.2 in 2021 to 3.08 in 2022, but it remains high. This indicates heavy reliance on borrowed funds, increasing financial risk. However, the times interest earned ratio rose significantly, showing Ace Company’s ability to cover interest payments comfortably. Additionally, net income grew from $2.15 million in 2021 to $3.468 million in 2022, reflecting stronger profitability to support debt repayment.
Other factors bolster confidence. The price-to-earnings ratio dropped from 26.5 to 20.7, suggesting the market views the stock as reasonably valued. Stable dividends of $2 per share also indicate financial discipline. However, the high dividend payout ratio in 2021 (55.8%) compared to 2022 (34.6%) suggests past pressure on cash reserves, which has eased but remains a point to monitor.
Loan Recommendation
Approving the $3 million loan is advisable, given Ace Company’s solid profitability and ability to cover interest obligations. The growth in net income and improved gross profit margin (47.7% in 2022 from 44.7% in 2021) demonstrate operational strength. However, risks related to low inventory turnover and a declining current ratio cannot be ignored. These could limit cash flow, particularly if economic conditions worsen.
To mitigate these risks, I recommend the loan approval be conditional on Ace Company developing a plan to address inventory inefficiencies and improve receivable collections. Regular monitoring of these metrics during the loan term will help ensure repayment capacity. The proposed equipment and software investments could enhance productivity, further supporting the company’s ability to meet its obligations.
Appendix: Supporting Financial Data
- Accounts Receivable Turnover:
- 2021: 4.58 (Net Sales $19,000,000 / Avg. Receivables $4,150,000)
- 2022: 5.06 (Net Sales $22,000,000 / Avg. Receivables $4,350,000)
- Inventory Turnover:
- 2021: 2.0 (COGS $10,500,000 / Avg. Inventory $5,225,000)
- 2022: 1.92 (COGS $11,500,000 / Avg. Inventory $6,000,000)
- Industry Average: 10 times per year
- Key Ratios:
- Current Ratio: 1.68 (2021), 1.37 (2022)
- Debt-to-Equity: 3.2 (2021), 3.08 (2022)
- Times Interest Earned: 7.08 (2021), 9.97 (2022)
- Profitability Metrics:
- Gross Profit Margin: 44.7% (2021), 47.7% (2022)
- Net Profit Margin: 11.3% (2021), 15.8% (2022)
References
Brealey, R. A., Myers, S. C., & Allen, F. (2020). Principles of corporate finance. 13th ed. McGraw-Hill Education.
Damodaran, A. (2018). Narrative and numbers: The value of stories in business. Columbia University Press.
Palepu, K. G., Healy, P. M., & Peek, E. (2022). Business analysis and valuation: Using financial statements. 6th ed. Cengage Learning.
Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2021). Fundamentals of corporate finance. 12th ed. McGraw-Hill Education.
Wahlen, J. M., Baginski, S. P., & Bradshaw, M. T. (2018). Financial reporting, financial statement analysis, and valuation. 9th ed. Cengage Learning.
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