Out of the 7 ratios mentioned, which are more important for working capital lending and why? As a banker give your comments on these ratios of the company.

Answer 1(c) Following Ratios are more important for Working Capital lending: Debtors Turnover Ratio: This ratio measures the efficiency of the receivables management of the firm. It is an indicator of how fast or slow the debtors are realised. It is calculated by dividing the net credit sales of a company by average debtors outstanding during the year. A higher ratio indicates faster collection of debts. This is also used for calculating average collection period. Comments: Debtors Turnover Ratio is 2.0. It shows six month holding period of debtors. It also shows that collection from debtors is very slow and may include bad debts. In working capital lending bank creates charge on debtors. Normally bank does not allow lending against the debtors outstanding more than 6 months. Hence this ratio is not satisfactory. Inventory Turnover Ratio: This is an indicator of how fast or slow is the movement of inventory. It is calculated by dividing cost of goods sold by average inventory. A higher ratio indicates faster movement of inventory. This is also used for calculating average inventory holding period. Also indicates a faster working capital borrowed and helps in lower interest liabilities. Comments: Ratio is 1.25. It shows that inventory holding period is about 9 months. It implies that stock is not moving smoothly. Stock may contain unsalable stock or quality of stock is poor or not acceptable in the market. Bank creates charge on inventory at the time of lending of working capital loan. Bank will not accept this old or poor quality or non-movable stock. Hence it is not satisfactory. Fixed Assets Turnover Ratio: This ratio is calculated by dividing Net Credit Sales by Fixed Assets. A higher fixed assets turnover ratio indicates that a company has more effectively utilize investments in fixed assets to generate revenues. Comments: Ratio is 0.80. It shows that turnover is 80% of Fixed Assets. Sale is lower with compare to installed capacity (Fixed Assets). Stock and Debtors holdings of the company are also higher. Company has some issues in product or in its market. Lower ratio shows lower capacity utilisation, which is not good for the short term solvency of the company. It is not satisfactory. Net Profit Margin: Net Profit Margin = Net Profit / Net Sales x 100 Company should have sufficient net profit margin as bank evaluate the profitability of firm at the time of working capital lending. Comments: Ratio is 5%, which may be treated as satisfactory. Gross Profit Margin: Gross Profit Margin = Gross Profit / Net Sales X 100. Reflects earning margins of company. It is important to assess the short term viability of business. Comments: Ratio is 25%, which may be treated as satisfactory.