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Assignment 2 - FSA

Lion Tools Corporation is applying for an RM8 million short-term loan from CIMB Bank to finance its growth initiatives and Mr. Fauzie Fau has submitted two years of financial statements for review. You will need to analyze Lion Tools' financial ratios and performance based on the financial information provided and make a recommendation to your boss on whether the loan should be granted. Insights are also given from two other banks that have previously lent to Lion Tools regarding the company and its determined manager.

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58 views7 pages

Assignment 2 - FSA

Lion Tools Corporation is applying for an RM8 million short-term loan from CIMB Bank to finance its growth initiatives and Mr. Fauzie Fau has submitted two years of financial statements for review. You will need to analyze Lion Tools' financial ratios and performance based on the financial information provided and make a recommendation to your boss on whether the loan should be granted. Insights are also given from two other banks that have previously lent to Lion Tools regarding the company and its determined manager.

Uploaded by

zaza
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOC, PDF, TXT or read online on Scribd
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BACHELOR DEGREE IN BUSINESS

ADMINISTRATION

BAC2124 FINANCIAL STATEMENT


ANALYSIS

ASSIGNMENT 2

GROUP
PHOTO

PREPARED FOR
MR. WAN MD AFNAN

PREPARED BY
[ STUDENT NAME - ID ]
[ STUDENT NAME - ID ]

SUBMISSION DATE
30th MAY 2021
Group Assignment
[15%]

BAC2124 – Financial Statement Analysis

INSTRUCTIONS:
1. Do ALL accordingly.
2. Your assignment should be typed neat on an A4 white paper using 1.5
spacing between lines.
3. Font size is 12 and font face is Arial.
4. Paper margin (top, bottom, left and right) should be an inch.

FINANCIAL STATEMENT ANALYSIS


(50 MARKS)

You are the Vice President of Corporate Credit Department at CIMB Bank.
Your main responsibility is to review applications for loans. You are at present
reviewing a short term loan application of RM8 million by the Lion Tools
Corporation (LTC). LTC manufactures various types of high quality punching
and deep-drawing press tools for kitchen appliance manufacturers.

CASE CONTEXT
LTC has been into the market for 2 years and has recently gone through the
initial public offering (IPO) process and has become a public company. LTC
has an annual sale of RM45 million in year 2016. LTC makes unique tools for
kitchen appliances. For the past 2 years LTC has spent so much on the R&D.
LTC’s 2-years performance revealed challenges in terms of Account
Receivables collection. Within this 2-year period, LTC availed loans from
HLBB and Agro Bank. Though Mr Fauzie Fau has proven himself to be very
likeable and persistent person, the company’s 2-year performance poses a
challenge for him and for LTC to avail the RM8M from CIMB.
You as the VP of the Credit and Corporate Loan is in dilemma now on
whether to approve the LTC’s request for the short term loan given the
information he got from asking the other 2 banks who handled LTC’s loan.
LTC has a good working relationship with the other two banks. Both Banks
have praises for the company and its determined manager. However,
unwilling to increase LTC’s borrowing limit based on their average leveraged
position.

LTC had experienced extraordinary growth, fueled by heavy spending on


research and development and a rapid expansion of its sales force. Its
technical staff was very well regarded at developing new products with a wide
range of applications. The combination of state-of-the-art products and a
rapidly expanding market resulted in sales growth of 10% per year. Mr. Fauzie
believed that industry sales would continue to grow at this rate and that any
failure to maintain LTC’s market position would be damaging in terms of
competitive position and internal morale.
Sales volume, which had grown continuously from the start, was always large
in relation to the available capital. The situation was exacerbated by large
operating losses as LTC entered new markets aggressively. Management met
the financing pressures by heavy reliance on short-term credit
With the two-year financial statements, you will have to assess the viability of
approving LTC’s loan request.
The case will be analyzed using your perspective. Also, it will be assumed
that LTC is a start-up company and this is the main reason why LTC relied
heavily on short term loans to finance their initiatives for growth
Mr Fauzie Fau, the financial manager of LTC, has submitted a justification to
support the application for a short-term loan from CIMB for a 8M loan.
Extracts of the Statement of Comprehensive Income and Statement of
Financial Position of LTC, submitted with the justification to BBB, are provided
below:
Mr. Fauzie Fau was perfectly willing to pledge the company’s accounts
receivable, inventory or anything else that the bank thought would be
desirable security as long as the arrangement was fair to the company and
specific enough so that he could count on having the funds available when he
needed them. You explained that the bank was always interested in sound
loan proposals from companies that showed the promise of developing into
good accounts. You promised to study the request and said that you hoped to
visit the company in the near future.
Mr. Fauzie Fau also pointed out that LTC was a familiar name to two other
major banks and suggested you to consider seeking the insights of the loan
officers involved. Summaries of their comments are provided as below:

Bank of HLBB (Asset Based Lending Division):


“Fauzie Fau is a very likeable, magnetic person who puts you through
challenging but enjoyable mental gymnastics during negotiations. He is also a
grinder who comes back once a week with a new request. He never lets up
when he wants something; just keeps coming at you and grinding away. The
CEO, Pak Wan also tries to get to the highest possible authority, even on
mundane issues. He left HLBB because of our unwillingness to add to LTC’s
highly leveraged position. We simply didn’t believe that the quality of the
assets warranted higher lending limits.”
AGRO Bank (Technology Lending Group):
“Pak Wan is extremely honest and made LTC an open book. The bankers
were invited to the strategic planning meetings and were kept informed of
developments at the company. Pak Wan is well trained, with an MBA from

STATEMENT OF FINANCIAL POSITION OF LION TOOLS CORPORATION


AS AT 31 DECEMBER
2019 (‘000) 2018 (‘000)

ASSETS
Non-current assets
Land 1 000 1 000

Plant and equipment 31 000 26000

Dep (13000) (10000)

Current assets
Cash and cash equivalents 1 800 2 000
Trade receivables 7 600 6 000

Inventories 5 220 5 220

TOTAL ASSETS 33 620 30 000

EQUITY AND LIABILITIES


ordinary share 4 000 4 000

Retained earnings 6 620 4 000

Non-current liabilities
Debentures 4 000 4 000

Current liabilities
Trade payables 15 600 15 000

Accrued expenses 3 400 3 000

MIU, and is a tough, effective CEO. He is a doer and a shaker.”

EXTRACT OF THE STATEMENT OF COMPREHENSIVE INCOME OF LION


TOOLS CORPORATION FOR THE YEAR ENDED 31 DECEMBER

2019 (‘000) 2018(‘000)


Revenue (all credit) 45 000 40 909
Cost of sales (23 000) (20 909)
Gross profit 22 000 20 000
Selling and admin
(13 000) (11 818)
expenses
Other expenses
(3 000) (2 000)
(depreciation)
Finance costs (412) (400)
Profit before tax 5 588 5 782
Income tax expense (2 235) (2 313)
Profit for the year 3 353 3 469
**ordinary dividend 733 000 758 000
TOTAL LIABILITIES
33620 33000
AND EQUITES

REQUIRED
Prepare REPORT to submit to your boss, as to whether finance should be
granted to Lion Tools Corporation. The contents should have:
1. Ratio Analysis for year 2018 and 2019 (in table)
o Profitability Ratio
 Gross profit margin
 Operating profit margin
 Net profit margin
o Liquidity Ratio
 Current ratio
 Acid test ratio
o Leverage Ratio
 Debt ratio
 Interest cover ratio
o Efficiency Ratio
 Inventory turnover
 Average Collection period

- Compute the Horizontal and Vertical Analysis

2. Recommendation.
Based on ratio analysis, evaluate the performance of the company and
your suggestion to your boss.

FORMAT

 Provide comments and evaluations under the respective topics provided.


 You may assume 365 days in a given year and you are not required to use
averages.
 Assume credit purchases are equal to cost of sales.
 Show all your workings and round to 2 decimal points.
 Use font Arial 11 in preparing your report.
 Prepare slides for group presentation
 You need to submit hardcopy and softcopy.

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