Commerce National Bank: Athletequip Inc. Case Analysis

This case study analyzes Athletequip Inc., a company seeking a line of credit from Commerce National Bank. The analysis focuses on the bank's evaluation of the company based on the 5Cs of credit: Character, Capacity, Condition, Capital, and Collateral. The analysis examines the company's financial statements, including balance sheets, income statements, and industry comparisons. The study assesses the company's profitability, liquidity, and debt-equity ratio to determine whether the loan should be sanctioned, the appropriate terms and conditions, and the associated risks for both the bank and the company. The study provides recommendations for loan terms, including requirements for audited financial statements, collateral, and ongoing monitoring. The conclusion emphasizes the need for careful monitoring of the company's performance, particularly its profitability, and highlights the importance of a thorough risk assessment before approving the loan.

PART A.
ATHLETEQUIP INC COPANY ANALYSIS.
INTRODUCTION.
The Atletequip Company was incorporated in 1979. Since then Third First State Bank in
Alhambara, California, have been the bankers of the company. However the situation has
changed in the last 6 months after the ownership of the bank changed. Due to change in
Bank’s management those who were familiar with functioning of Athletequip Company were
no longer working with bank. Further Third First State Bank was not in a position to finance
the additional credit requirements of Athletequip Company since this would exceed the legal
lending limits of the Bank.
Therefore the borrower has contacted Commerce National Bank In Alhambara and requested
for a line of credit amounting to $ 550000 for expansion of its production capacity.
Athleteuip has already forwarded the following information to the bank.
(i) Unaudited balance sheet and earnings statements of last 3 years,
(ii) Changes in Equity.
(iii) Credit report of the company and its principals.
(iv) Industry Comparisons.
The bank after doing analysis of the data provided by the Company will meet the top
management of the prospective borrower. CNB will have to decide on the following ;

(a) Whether loans should be sanctioned and on what terms and conditions.
(b) Is the quantum loan sought justified.
(c) What are the risks to which the bank and company will be exposed.
ANALYSIS.
For finding an answer to these questions, first of all the bank will carry out a 5C
analysis of the prospective borrower.
(a) Character
The following points are scrutinised under this head.
 Integrity of the borrowers based on their past repayment records.
 Education and experience in the related industry of the persons in charge
of management.
 Successful past track record in business.
 Past and pending court cases of the persons in charge of management.
The personal records of promoters and guarantors will also be reviewed.
(b) Capacity
The cash flow will be scrutinised for ascertaining whether the borrowers will be
able to repay the loan and interest after meeting all operating expenses.
(c) Condition.
Lender will evaluate the business environment in which the borrower and the
industry are currently operating.
(d) Capital.

Whether the owners will bringing in fresh capital. This will inspire confidence
with the bankers, since it indicates that the promoters have confidence in
managing their business profitably.
(e) Collateral.
This means the assets of the company and the personal assets provided by the
guarantor by way of security for repayment of loan.
(Sheppard T. n.d)
Analysis of 5Cs with reference to the borrower.
Character.
This is a very important factor for bankers. In exhibit 5A the external rating
agency has observed that apart from a slight deterioration in the financial results
of the company in the last financial year, the financial position of the company is
satisfactory. However the trends of the current financial year, if it is maintained,
shows that the turnover of the company will again increase this year. The report
concludes by saying that the account is well regarded.
The promoters of the company do not have any past criminal records. The
company has also never defaulted in its payments in the past.
The promoters are also well qualified and have long years of experience in this
line of business.
So the first condition is satisfied.
Capacity

From the income statement for the last financial year it can be seen that it has earned a
profit after tax of $ 30511 (previous year $ 66586). The cash profits for the last
financial were $ 63512 (Corresponding period of previous financial year $ 100611).
Further the financial statements are unaudited. Net profit as a % of Net Sales is 1.77
% as 3.83 % in the previous. Return on equity at 6.21 % is lower than the industry
standards of 16.40 %. Only its return on assets is higher than industry standards
because it is operating from rented premises and has no investments in land and
buildings.
Debt Equity Ratio is 42.40 % against industry average of 168 %. Even assuming that
additional debt of 550000 is sanctioned, the total debt equity ratio will be 154.64 % so
it has debt raising capacity. Its current ratio and quick ratio,(which indicate short term
solvency position), is also 3.09 and 1.34. This is also very good as per global
standards. Working capital management is better than industry standards as can be
seen from the table below
Industry Ratio Borrower ratio
Days sales in receivables
ratio
54 days 35.88 days
Days COGS inventory 111 days 99.62 days.
Please refer to the enclosed excel sheet for details of calculations.
Profitability is an area of concern.
Condition
Though the market has been very competitive, the applicant has successfully faced
competition. The company estimates that it has a market share in the supply of

football pants in USA. There is also nothing to indicate that the industry is affected by
trade cycles.
Therefore this is also a favourable state of affairs for the company.
Capital.
The owners will also not bring fresh capital. Banks will insist that a certain portion of
the fresh loans sought by the company should be contributed by it from internal
accruals and from fresh equity capital brought by the promoters.
Collateral
Details are as follows ;
$
Primary
Inventory 301184
Receivables 169734
Secondary
Net Fixed Assets 154945
Promoter
Collaterals
820381
Total 1446244
So it seems to be adequate.
(a) Whether loans should be sanctioned and on what terms and conditions.
Terms and conditions

Sanction.
The applicant has sought loans for $ 550000. Since it is stated that the plans of
financing the capital expenditure would be considered at a later date therefore the
entire line of credit sought is for financing working capital requirements.
Since the bank has no previous experience of dealing with this company it should
take necessary precautions by including the same in the terms and conditions.
Terms and conditions.
Loans may be sanctioned but prior to disbursal the following conditions should be
fulfilled by the Company.
 Applicant should get its financial statements audited by an independent auditor
for all the 3 financial years for which the statements have been furnished.
 For the current financial year, the accounts for the 1st Quarter should be
prepared and got audited by an independent auditor.
 Projected financials for the current year and for next 2 financial years.
 Valuation report of assets of the company from an independent valuer.
 Promoters should bring 25 % of the sanctioned amount by way of company’s
contribution to margin money or before the end of the financial year..
 Certificate from previous bankers regarding conduct of the account.
 Promoters should agree to provide collaterals equal to the sanctioned limits.
 To hand over title deeds of properties provided as collateral of the company
and promoters by way of equitable mortgage.
 To arrange meetings with top 5 customers and suppliers.
After disbursal
 Providing Monthly stock statements showing the amounts which can be drawn
for financing working capital within the overall sanctioned limits to be
provided on or before 15th of each month.

 To provide provisional balance sheet and income statement on a quarterly
basis and funds flow statement on a half yearly basis.
 Allow independent firm of auditors appointed by the bank to do physical
verification of inventory and checking the stock statements once a year.
 Allowing bank officials to carry out an inspection of the bank premises at least
once in a year.
(b) Is the quantum loan sought justified.
It seems to be justified in view of the projected increase in turnover. Further the
working capital management is better than industry standards.
(c) What are the risks to which the bank and company will be exposed.
The main concern is with profitability ratios. However the Company has assured the
bank that turnover in the current financial is likely to be more than preceeding 3
financial years. A closed watch has to be kept by the bank over the actual
performance.
Reference.
Sheppard T. (n.d) The 5Cs of credit, retrieved on 07/07/18 from
https://www.liveoakbank.com/wine-and-craft-beverage-resources/the-5-cs-of-
credit/