FIN320 - One

Should the bank give the requested loan?

If the loan is given, will it be repaid together with interest?

What is the financial institution's remedy if the assumptions about the loan turn out wrong?

Has adequate liquidity so it can honour short-term obligations easily

Run efficiently

Run profitably 

The proprietor's stake is high (business is not burdened by too much debt)

Trend (time series) analysis

Safety buffer

Stress testing

Industry analysis

Economic analysis

If the business was run profitably for some years, then it may not be unreasonable to assume the trend will continue.

If the business has a large margin of safety (between actual sales and break-even sales) then some fluctuations in business conditions in the future may not be a cause for worry.

The business can be subjected to sensitivity testing. 

If the business continues to remain profitable, then the lender can be reasonable certain that the business can withstand shocks in the future.

Trends and prospects for the industry?

If industry is growing, the firm can be expected to grow.

Trends in the domestic and international economies can be used to gauge the possible impact on the business.

Collateral 

Charge on assets 

Guarantees 

Conditions

Cross-sectional techniques (ratio analysis)

Times series techniques (trend (indexed) statements, trend of financial ratios, variability measures)

combo of financial statement information and non-financial statement information

Liquidity ratios

Profitability ratios

Efficiency ratios 

Leverage ratios

Current ratio

Quick ratio

Gross profit-sales ratio

Net profit-sales ratio

Inventory turnover ratio

Average collection period

Debt-equity ratio

Interest coverage ratio

Expressing items in an indexed form.

Choose one year as the base, then express the values for each item on the statement for subsequent years relative to their value in the base year.

Sensitivity analysis

Break even analysis

Margin of safety 

Cash break even point