Financial Ratios Analysis
Financial Ratios Analysis
The audited financial statements are necessary since they confirm the financial information reflected in the statements is reliable. The trustworthiness of the financial statements is essential since it ensures that the decision arrived is not arrived through misleading information (Needles & Powers, 2011). Indeed, the P. Jason Corporation could be offering manipulated financial statements that do not reflect its actual financial performance and position to acquire the loan, which will expose the White Sands Bank to risk of failing to recover the money in the future. The financial ratios provided reflect a favorable financial position of the P. Jason Corporation of accessing the loan. The financial ratios indicates that the financial performance of the company is increasing, which is a positive ground of getting the credit since it demonstrates it has the capacity of honoring the financial obligations in the future. However, the financial ratios that have been offered by the president of the P. Jason Corporation are not relevant in approving the loan. The rationale behind the argument that the financial ratios provided are not relevant in making the decision is because they do not reflect the solvency risk of the company, which is essential in determining the ability of a firm in honoring long-term financial obligations (Brealey, Myers, & Allen, 2012).
The various financial ratios that have been offered depicts that the performance of the P. Jason Corporation is improving. The current ratio that measures the financial liquidity position of a firm has increased from 2.1 in 2016 to 3.1 in 2017. The increment of the current ratio is a favorable since it indicates that the ability of the firm to meet current financial obligations has improved (Vernimmen, 2011). The significance of the current ratio is that it is used to negotiate for short-term financial credit such as overdraft and supply of raw materials on credit since the firm can demonstrate that its liquidity position is strong to meet short-term financial liabilities (Vernimmen, 2011). The asset turnover ratio that measures the efficiency of utilizing the assets of a firm to generate revenue also reflects a favorable trend. The asset turnover of the P. Jason Corporation has improved from 2.2 to 2.8 in 2016 and 2017 respectively. Thus, the company’s efficiency in using the assets to generate revenue is improving.
The significance of the asset turnover in financial analysis is demonstrating the potential of a firm to enhance its financial performance in future by utilizing its resources efficiently (Brealey, Myers, & Allen, 2012). The earnings per share also indicate that the financial performance of the firm is moving in the right direction. The earnings per share have increased from $2.50 to $3.30, which is an indication that the profitability of the company is improving. The significance of the earnings per share ratio is demonstrating to the shareholders and prospective investors on the earnings attributed to each outstanding share in diverse financial years to determine whether to buy, hold, or sell a stock because of the returns it promises (Damodaran, 2011). The change of the net income depicts a favorable since it has increased by 32% in 2017 compared to downfall of 8% in 2016 financial year. This change of the net income is essential since it demonstrates the potential of the company to generate earnings for the shareholders in the future.
The other three financial ratios to require in assessing the P. Jason Corporation are interest coverage ratio, debt-equity ratio, and the debt ratio. The interest coverage will be used in the analysis since it demonstrates the ability of the firm to meet the interest costs attached to the loan offered (Damodaran, 2011). Similarly, the debt-equity ratio and the debt ratio will be required in the analysis since they assesses the solvency financial position of a firm. The two ratios will help in determining if the firm’s debt level is sustainable or unsustainable in meeting its long-term financial obligations (Needles & Powers, 2011). Moreover, as the loan officer I would be interested in understanding the viability of the operation expansion the loan is expected to fund. The information on the viability of the operation is essential in deciding to offer the loan since it will demonstrate if it has the potential of generating returns to repay the loan and interest amounts in the future (Brealey, Myers, & Allen, 2012). The analysis of the firm’s financial position from the information provided by the president of P. Jason Corporation demonstrates it is recommendable to approve the loan. The loan should be approved since the financial information offered indicates that the firm’s financial performance and position are improving that are vital in generating money to repay the loan.
Brealey, R. A., Myers, S. C., & Allen, F. (2012). Principles of corporate finance. New York, NY: McGraw-Hill Education.
Damodaran, A. (2011). Applied Corporate Finance: A User’s Manual. New York, NY: John Wiley & Sons.
Needles, B. E., & Powers, M. (2011). Principles of financial accounting. Mason, Ohio : South-Western Cengage Learning.
Vernimmen, P. (2011). Corporate finance: Theory and practice. Chichester, West Sussex: Wiley.