(Ratio Computation and Analysis; Liquidity) As loan analyst for Utrillo Bank, you have been presented the following information.
Toulouse Co. Lautrec Co.
Cash $ 120,000 $ 320,000
Receivables 220,000 302,000
Inventories 570,000 518,000
Total current assets 910,000 1,140,000
Other assets 500,000 612,000
Total assets $1,410,000 $1,752,000
Liabilities and Stockholders' Equity
Current liabilities $ 305,000 $ 350,000
Long-term liabilities 400,000 500,000
Capital stock and retained earnings 705,000 902,000
Total liabilities/stockholders equity$1,410,000 $1,752,000
Annual sales $ 930,000 $1,500,000
Rate of gross profit on sales 30% 40%
Each of these companies has requested a loan of $50,000 for 6 months with no collateral offered. Inasmuch as your bank has reached its quota for loans of this type, only one of these requests is to be granted.
Which of the two companies, as judged by the information given above, would you recommend as the better risk and why? Assume that the ending account balances are representative of the entire year.
The solution explains how to determine the which company is a better risk using ratio analysis