As a credit analyst for Southern Bank & Trust, it would be a positive business decision to extend
the $350,000 line of credit to Jones Electrical Distribution (JED). JED’s financial strength has
improved due to its ability to turn a profit over the past few years. Even though taking discounts
has significantly drained the company’s cash leaving no other choice than to obtain additionally
financing, the business is operating effectively.
One trend that is shown on the income statement is that the company has been increasingly
growing from 2004-2007. Total sales have increased approximately 18% every year.
Simultaneously, operating expenses as a percentage of sales has been decreasing. This alludes to
the notion that there is improvement in JED’s operations. While the profit margin is assumed to
be significantly low, the EBT and Net Income have been increasing since 2004.
Ratio analysis proves that the current ratio has been decreasing approximately 12% from year to
year which indicates that the company’s current liabilities are out growing its current assets. If
this trend continues, JED will find it difficult to pay off its debt. Another trend is that the cash
conversion cycle is too long. It takes JED around 100 days to convert resources into cash flows.
In addition, the accounts receivable and inventory propose some concern due to excessive
growth rates. As referenced, the accounts payable almost tripled in 2007. With these growth
rates, the additional financing is also needed to sustain JED’s operations.
In 2006, JED decreased its cash numbers almost 57% which is no wonder that a need for
