FINANCE

Financial Analysis of Custom Snowboards Inc.

[Name of the Institute]

Task 'A'

Introduction

This report has been commissioned by the Chief financial officer (CFO) of the bank to analyze the financial position of the company Custom Snowboards Inc. and present recommendations on the loan application by the company. The financial statements of the company reflect a true picture of the company's financial health and status. The bank officer must analyze the financial ratios of the company against the industry benchmarks as well the past performance of the company. The important ratios that may affect the bank officer's decision include the profitability and leverage ratios of the company. The profitability ratios will indicate the company's ability to generate profit for its equity and debt holders. These ratios depict the overall health of the company and performance of the company, while the latter category reflects the potential ability of the firm to pay its long term debt and obligations.

Risk Analysis

The main risk that the banks on providing this loan is the risk of default, also known as the credit risk. The company needs to take two major actions in order to ensure the bank of its willingness to repay to loan. First step is to keep a valuable asset as collateral to the bank. This will serve as a guarantee to the bank, which will be given back to the company after repayment of the loan. Second plan to action is to increase the Times interest earned ratio of the company. TIE ratio represents the company's ability to repay its interest payment from the Operating income (Grossman, 2009).

Analysis of the Ratios

The main ratios that must be analyzed by the bank officers include the Debt ratio, the TIE ratio, current ratio and net profit margin. Custom Snowboards Inc. The interest coverage ratio has decreased from 2.58 from year 13 to 1.29 in the year 14. It has adversely affected the financial ability of the company to pay interest cost as it is reflects a declining trend since the previous year. The company's operating profit is declining against the amount of interest to be paid. Moreover, the net profit margin has also decreased from 1.5% to 0.3% in the year 14. This is a negative indicator for the bank. Also the company has already taken around 50 % loan against the assets. However, the Current ratio reflects a liquid company. Although TIE is comparatively lower; but the company is in a good position to fulfill its short term liabilities against the current assets (Garman, 2010). This is a positive sign for the banker as it is very imperative to know what value the company will generate if it liquidates all its assets

Recommendations

Considering the ratio analysis and the overall financial position of the company, it is not recommended to approve the loan of $ 1,000,000. The company is already under high leverage and may find difficulty in repaying the loan. Moreover, the times interest earned does not support the firm in terms of interest payment. However, the bank may offer ...