Financial statement analysis is a powerful tool that helps to determine the financial health of a company and its ability o continue operating into the foreseeable future. Banks need to analyze the financial statements of a company before they can grant a loan to determine their ability to repay. Any financial institution must be sure that a client will be able to repay the loan as agreed and this will be determined by examining the financial statements. The performance trends are also critical in assessing the creditworthiness of a client and their ability to repay. An analyst uses trend analysis to establish past performance and the potential for future growth.
Need for Audited Financial Statements
An audit of the financial statements is a process of determining the authenticity of the financial statements and whether they present an accurate and fair view of the firm. An independent or nonpartisan auditor examines the books of account to establish any material errors. Audited financial statements provide beneficial and accurate financial information for the company. Such information can be instrumental to the bank in assessing the creditworthiness of the company. The bank can also evaluate the financial position of an entity, its liquidity, indebtedness, and solvency before it can offer any credit (Subramanyam, 2014). Audited financial statements are therefore critical in determining the financial health of a company thus enhance the ability of a company to access credit.
Delegate your assignment to our experts and they will do the rest.
P. Jason Corporation provided information on the current ratio, asset turnover, net income and the earnings per share. The current ratio for the two years provided by the president shows that P. Jason is in a sound financial position to meet its short term obligations. Asset turnover ratio indicates the efficiency of P. Jason to generate sales. The sales for the company are two times and three times the total assets in 2016 and 2017 respectively. It shows the efficiency of the management in producing the company’s products and generating sales. The net income for 2017 also increased substantially compared to the previous year when there was a decline. The president also provided earnings per share which were $2.5 and $3.3 which shows that the performance of the company is good.
The data covers two years and can offer an insight into the performance of the company. The information provided by Paul Jason is incomplete for evaluating the creditworthiness of the company. He should provide audited financial statements for the company. Such records will be critical in analyzing additional financial ratios for assessing the company's ability to repay the loan (Subramanyam, 2014). Audited financial statements are credible and can be relied upon to decide on whether to fund Jason or not.
According to the financial information provided by Jason, the company shows a positive trend in its financial performance. The current ratio increased from 2.1 to 3.1 a favorable change that shows that the company can meet is near term financial needs. Assets turn over shows a promising trend has increased from 2.2 to 2.8 indicating that the assets are efficiently used to generate sales. Net income shows a favorable direction for the company since the revenue is increasing; therefore, the investors have high returns if net income continues to grow. Earnings per share are also favorable since it rose from $2.5 in 2016 to $3.3 in 2017. Such changes imply that the shareholders reported higher returns in 2018. Such changes in the performance of the company indicate that the company has higher chances of accessing credit from the bank if it meets additional requirements.
Additional Ratios
Debt to equity ratio
Debt service coverage ratio
Debt to asset ratio
Debt to equity ratio shows the volume of debt that the company has compared to the contribution from the shareholders. If Jason Company has a great obligation, then it shows that it is risky and therefore the loan should not be granted. Debt service coverage ratio indicates the ability of the company to service its current loan. Debt to asset also shows how much assets are financed by debt. If the more assets are funded by debt, then the company is at risk if it is unable to repay its debt since its assets cannot recover the entire loan amount (Subramanyam, 2014).
As a loan officer, it is critical to determine the ability of Paul Jason to repay the loan. A thorough analysis of the financial statements and the company's past performance can give an insight into the strength of the company to repay the loan. The historical performance of the company and its creditors can provide a clear picture of how the company is performing. If Jason can pay its creditors on time and past performance indicate a growing trend, and then the company can access the loan since it is a clear indication that the company will repay its loan ( Needles & Powers, 2013) . Other considerations include the collateral that Jason is providing, the company’s capacity to repay the loan, the character of Jason his capital outlay and ability to meet the laid down conditions (Lough, 2013).
Based on the analysis, Jason should provide additional information that will ensure that the loan is approved. He should provide audited financial statements for at least two years. Similarly, he should adhere to all the conditions set by the bank and offer additional information that will be used to determine his character and capacity to repay the loan (Lough, 2013). Based on the current analysis it is not possible to recommend to the bank that the credit should be approved.
References
Lough, W. (2013). Business finance . Theclassics Us.
Needles, B., & Powers, M. (2012). Financial accounting . Mason, OH: South-Western
Subramanyam, K. (2014). Financial statement analysis . New York, NY: McGraw-Hill.
