As a loan officer, I will first inquire whether the business has the ability in meeting its long-term financial undertakings. The possession of optimistic net worth in addition to a controllable debt load will be enough evidence of a business solvency status (O’Connor, Jr. et al., 2006; Graham et al., 2006). Ratios of importance here include the debt to equity ratio, which measures the financial leverage of a business enterprise. A high value will indicate a high-interest expense thereby limiting this business’s capability in raising additional capital. In addition, the debt to asset ratio will also be necessary for determining the percentage of this business asset which is financed by short and long-term debts. Finally, I will pay attention to interest coverage ratios, which will help me in estimating this firms’ potential in meeting the interest income of the company in arrears.
Secondly, I will look for its profitability ratios, which signify its performance in comparison to its ability in generating positive returns from its investment or sales (O’Connor, Jr. et al., 2006; Graham et al., 2006). Specifically, I will look for gross profit margin ratios, which indicate business ability in controlling its sales expenditure thereby appraising the ability of the business in managing its cost of sales and expenses. Moreover, I will look at a business operating profit margin to understand the ability of this business in controlling its operating expenditures and if it has a high percentage, then it is a worthwhile venture. Finally, I will estimate this business net profit margin ratio to help me in assessing a company’s potential in effective control of its financial expenditure.
Third, I will look for this firm’s capability in meeting its obligations in the short run or paying its creditors from its available cash (O’Connor, Jr. et al., 2006; Graham et al., 2006). In understanding this capability, I will look for its current ratios which will help in estimating the ability of this business in meeting its liabilities in the short run (1 year). Using a quick ratio, I will estimate the potential of this business in meeting its short-run obligations with the available liquid assets. In addition, I will estimate the business outstanding sales per day ratio which will indicate days that creditors take in making payments after receiving goods and services. A longer period will show that a business may be in problems while a short period is desirable.
The loans officer needs the following additional documents: tax compliant certificate, business registration certificate, names of the owner (s), any loans with any bank or SACCO’s (Credit history), proof of business existence (Local authority certificate of operation), bank statements, any title deeds/ motor vehicle log book/ any security allowed by the bank and passport photographs/ identification documents.
A company is a registered entity with perpetual life separated from its owners. For a registered company, gearing and valuation ratios would be of interest. These ratios measure the growth capability of a business, determine its firm’s value and investments made by investors (O’Connor, Jr. et al., 2006; Graham et al., 2006; Ross et al., 2013). Specifically, I will make an analysis of the earnings per share. This will indicate how much profits or earnings are attached to shares owned by different investors.
Secondly, I will look for the trend in returns for each share invested by shareholders. If earning is good, that is a motivation for a shareholder, which will, in turn, enable it to generate more capital for reinvestment.
As a credit officer, I will be also interested in the company’s memorandum and articles of association, the constitution of the company, annual general meeting declaration and credit history.
References
Graham, J.R., Harvey, C.R. and Rajgopal, S. (2006). Value destruction and financial reporting decisions. Financial Analysts Journal, 62 (5): pp. 27-36.
O’Connor Jr., J.P., Priem, R.l., Coombs, J.E. and Gilley, K.M. (2006). Do CEO stock options prevent or promote fraudulent financial reporting? Academy of Management Journal, 49 (3): pp. 483–500.
Ross, S. A., Westerfield, R. W., and Jaffe, J. (2013). Corporate finance. (10th Ed.). Print.