MBA Finance Report: Bujang Lapok Berhad Credit Line Recommendation

This report presents a financial analysis of Bujang Lapok Berhad, a sportswear manufacturer seeking a line of credit. It begins with a ratio analysis of the company's financial statements, calculating key metrics such as current ratio, acid test ratio, inventory turnover, and profitability ratios. The analysis compares these ratios to industry averages to assess the company's liquidity, profitability, and leverage. The report identifies the most crucial ratios for lenders, emphasizing profitability margins, return ratios, and the importance of liquidity and leverage analysis. The report then offers a recommendation on whether the bank should extend the credit, considering the company's performance against industry benchmarks. The conclusion is that the bank should consider the company's poor liquidity and profitability, which may influence the final decision. The report references several academic sources that support the analysis and recommendations.

ACCOUNTING AND FINANCE
FOR DECISION-MAKING

TABLE OF CONTENTS
MAIN BODY...................................................................................................................................1
Ratio Analysis..............................................................................................................................1
Most crucial ratios in the industry averages that shall be determining the extending of the line
of credit........................................................................................................................................2
Recommendation of whether the bank should extend the credit or not.......................................2
REFERENCES................................................................................................................................4

MAIN BODY
Ratio Analysis
The ratio analysis of the Bujang Lapok Berhad manufacturers for the current year as per the
financial statements that were provided.
S.NO RATIOS FORMULA CALCULATION
1 Current Ratio Current asset / Current liabilities 1.485
Current assets 29184
Current liabilities 19657
2 Acid Test Ratio
(Current asset – Inventory) / Current
liabilities 1.258
Current assets 29184
Inventory 4448
Current liabilities 19657
3 Inventory Turnover Ratio
Cost of goods sold / Average
inventory 10.585
Cost of goods sold 41304
Average inventory 3902
4 Average collection period Accounts receivable / Net sales * 365 13.744
Accounts receivable 2003
Net sales 53195
5
Non Current Asset
Turnover Revenue / Non current assets 2.840
Revenue 53195
Non Current Asset 18733
6 Total Asset Turnover Revenue / Average total assets 1.152
Revenue 53195
Average total assets 46187.5
7 Debt Ratio Total debts / Total assets 20.57%
Total debts 9858
Total assets 47917
8 Times Interest Earned
Earnings before interest and tax /
Interest expenses 4.466
Earnings before interest and
tax 4444
Interest expenses 995
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9 Net Profit Margin Net profit / Revenue * 100 3.89%
Net profit 2069
Revenue 53195
10 Return on Assets Net income / Total assets 0.043
Net income 2069
Total assets 47917
11
Return on Common
Equity
Earnings after taxes / Equity in
common shares * 100 507.11%
Earnings after taxes 2069
Equity in common shares 408
Most crucial ratios in the industry averages that shall be determining the extending of the line of
credit
Most of the ratios in the industry averages are crucial to analysed by the lenders who are
extending the line of credit on the requests of the company. It is important for the lenders of the
company to assess the financial position, liquidity position, leverage analysis, financial stability
and the future growth prospects of the company (Trpeska, Atanasovski and Lazarevska, 2017).
This shall assure them about the repaying capacity of the company and the timely payments of
the interest amount by the company to the lender. The most important are the profitability
margins and the return ratios that are indicating the growth and the rate of the returns that are
generated by the company. This is like the net profit margin, return on assets, return on common
equity will show the ability of the firm to pay back the debts of the company. Apart from that the
lenders must consider the liquidity position of the company so that they can efficiently meet the
short term obligations of the interest expenses that shall be arising for the loans. This is through
the current ratio and the acid test ratio (LE and LE, 2020). The leverage analysis shall be
showing the existing burden of the debts on the company, the lower it is the better it shall be for
the lenders. The inventory turnover and the average period for collection shall be indicating the
smooth working capital cycle in the company.
Recommendation of whether the bank should extend the credit or not
 The liquidity position of the business is poor in comparison to the industry averages
which is a concern for the lenders (3 Ratios That Are Important to Your Lender, 2021).
Like the current ratio of the company is 1.48 whereas that of the industry is 1.78.
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 Similarly, the profitability is also lacking for the company as the industry average is
4.70% and the company has the net profit margin of 3.89%. This is also the red signal for
the company.
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REFERENCES
Books and Journals
Trpeska, M., Atanasovski, A. and Lazarevska, Z. B., 2017. The relevance of financial
information and contents of the new audit report for lending decisions of commercial
banks. Accounting and Management Information Systems. 16(4). pp.455-471.
LE, M. T. and LE, D. N. T., 2020. Developing Traditional Handcraft Villages: The Determinants
of Lending Decision from Binh Duong Province's Banks in Vietnam. The Journal of
Asian Finance, Economics, and Business. 7(2). pp.151-156.
Online
3 Ratios That Are Important to Your Lender. 2021. [Online] Available through:
<https://www.kmco.com/resource-center/article/looking-forward/3-ratios-that-are-important-to-
your-lender/>
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