Question

Below you can find the comparative financial statements of “Alpha – Beta” company
in € for years 2017 and 2018:

Comparative Balance Sheet of “Alpha- Beta”
Assets	2018	2017	Liabilities & Stockholders’ Equity	2018	2017
Fixed Assets Property, Plant and Equipment Accumulated depreciation Net Property, Plant and Equipment Other Assets Total Fixed Assets Current Assets Cash and Cash Equivalents Accounts receivables Inventory Prepaid Expenses Total Current Assets Total Assets	3,250,000 (425,000) 2,825,000 725,000 3,550,000 300,000 900,000 1,100,000 100,000 2,400,000 5,950,000	2,100,000 (250,000) 1,850,000 550,000 2,400,000 300,000 750,000 800,000 100,000 1,950,000 4,350,000	Shareholders’ Equity Common Stock Retained earnings Total Stockholders’ Equity Long-term Liabilities Long-term debt Total Long-term Liabilities Current Liabilities Accounts Payable Short-term Debt Total Current Liabilities Total Liabilities Total Liabilities and Stockholders’ Equity	1,250,000 997,600 2,247,600 2,200,000 2,200,000 502,400 1,000,000 1,502,400 3,702,400 5,950,000	1,250,000 600,000 1,850,000 1,150,000 1,150,000 450,000 900,000 1,350,000 2,500,000 4,350,000

Required:
1. Assume that you want to conduct a credit analysis. In doing so, you need to calculate the following series of amounts and financial ratios for years 2017 and
2018, so to decide whether to provide a shot-term loan or not to “Alpha – Beta”:
a) net working capital, b) current ratio, c) quick ratio, d) cash to current liabilities ratio, e) days’ sales in receivables (based on accounts receivables at the end of the
period), f) days’ sales in inventory (based on sales and inventory at the end of the period), g) operating cycle, h) debt to equity ratio and i) times interest earned. For
your computations, assume that a year has 365 days.
2. According to the above analysis of “Alpha – Beta”, what do you notice about the company? Make a recommendation as a credit analyst if it is a smart choice to
lend the company or not.
3. The cash balance (i.e., cash and cash equivalents) is the most objectively measured asset relative to other current assets (i.e., inventories, account
receivables) and thus, a credit analyst should trust it, when analyzing a firm’s short-term liquidity. Do you agree?

Answer 1

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