The proprietors of two businesses, L.L. Sams Company and Melinda Garcia Career Services, have sought business loans from you. To decide whether to make the loans, you have requested their balance sheets. ClickUnit 1 Balance sheets to view.
Solely on the basis of these balance sheets, to which entity would you be more comfortable lending money? Explain fully, citing specific items such as the accounting equation and amounts from the balance sheets. In addition to balance sheet data, what other information would you require? Be specific.
I would be more comfortable loaning money to L.L. Sams Company. This company has more economic resources that they will benefit from in the future. They also have less in liabilities than Melinda Garcia Career services. Their balance sheet also indicates they have twice as much in Owners Equity than the career service. It appears that L.L. Sams Company would be more likely able to repay the loan because they only have $30,000.00 in liabilities, whereas Melinda Garcia Career Services has $174,000.00 in liabilities. They also have a considerable less amount in capital. Although they show more in assets. L.L. Sams Company will be the more likely company for fast growth.
Having said that, we should also examine the financial ratios of both companies so as to judge the firm’s Liquidity, Solvency, and profitability.
Based solely on the balance sheets, the following ratios can be calculated:
Current Ratio (a liquidity ratio that measures a company's ability to pay short-term obligations) = Current Assets / Current Liabilities
Quick Ratio (an indicator of a company’s short term liquidity) = (Current Assets – Inventories – Prepaid Assets) / Current Liabilities
LL Sams
Current Ratio = 108,500 / 12,000 = 9.04
Quick Ratio = 23,500 / 12,000 = 1.96
Melinda
Current Ratio = 19,000 / 6,000 = 3.17
Quick Ratio = 19,000 / 6,000 = 3.17
Other ratios to look into are:
- Debt/Asset Ratio = Total Liabilities / Total Assets (Indicates what proportion of equity and debt that the company is using to finance its assets)
LL Sams
Debt/Asset Ratio = 30,000 / 211,500 = 0.142
Melinda
Debt/Asset Ratio = 174,000 / 244,000 = 0.713
- Debt/Equity Ratio = Total Liabilities / Total Shareholder’s Equity (Indicates what proportion of equity and debt that the company is using to finance its assets)
LL Sams
Debt/Equity Ratio = 30,000 / 181,500 = 0.165
Melinda
Debt/ Equity Ratio = 174,000 / 70,000 = 2.486
From the above, it is clear that L.L. Sams has better ratios than Melinda Garcia Career Services, hence I would fell more comfortable loaning money to Sams.