Bank Ratios' Test

Bank Ratios:

a)      Current ratio = Current Assets / Current Liabilities.

b)      Debt ratio = Total Debt / Total Assets….(of 4:1 or less)

Other Business Ratios:

1)      Acid-Test ratio   =            Cash + Account Receivables + Marketable Securities

(also called Quick ratio)                                      Current Liabilities

2)      Leverage (Debt) Ratios

Debt to owners’ equity = Total Liabilities / Owners’ Equity

(anything above 100% shows that a firm has more debt than equity)

3)      Profitability Performance Ratios

a)  Basic Earnings per Share =                   Net Income after Taxes                         

# of common stock shares outstanding

b)  Return on Sales =                     Net Income after Taxes          

      Net Sales

c)  Return on Equity =                       Net Income after Taxes             

 Total Owner’s Equity

4)      Activity Ratios

a)  Inventory Turnover =                   Cost of Goods Sold                        

  Total Owner’s Equity

Understanding a Banker's Perspective

All bankers have two fundamental concerns when they make a loan:

1) How much income the loan will provide the bank, either in interest income or in fees

2) The likelihood that the borrower will default on loan.

Bank Underwriting Criteria for Commercial Loan Applications

The 6 C’s of Credit that the banker always considers are:

1. Cash Flow of the Borrower

2. The borrower’s Character,

3. The borrower’s Capacity to repay the loan,

4. The Capital being invested in the venture by the borrower,

5. The Conditions of the industry and the economy, and

6. The Collateral available to secure the loan.

A banker will also want to see the following detailed financial information:

1. Three years of the firm’s historical financial statements, which includes balance sheets, income statements, and cash flow statements,

2. The firm’s pro-forma financial statements (balance sheets, income statements, and cash flow statements), in which the timing and amounts of the debt repayments are included as part of the forecasts,

3. Personal financial statements showing the borrower’s net worth,(net worth = assets – debts), and estimated annual income.