Accounting

Debt ratio for Creek: For creek it is 16,520,000/50,000,000 = 0.33

Debt ratio is a ratio that indicates what proportion of debt a company has relative to its assets. The measure gives an idea to the leverage of the company along with the potential risks the company faces in terms of its debt-load. A debt ratio of greater than 1 indicates that a company has more debt than assets, meanwhile, a debt ratio of less than 1 indicates that a company has more assets than debt.

Generally, creditors/banks prefer lower ratios, because it means that the company has a cushion against debt. Since the industry ratio is 0.51, this spells good news for Creek.

Times Interest Earned Ratio: For Creek it is 3,000,000/1,000,000 = 0.3.

It indicates the extent of which earnings are available to meet interest payments. A lower times interest earned ratio means less earnings are available to meet interest payments and that the business is more vulnerable to increases in interest rates.

Generally, creditors want this number higher, because it means the company has enough money to cover the interest required by the debt. Since the industry ratio is 7.30, this is not exactly good news for Creek.

Fixed payment Coverage Ratio:

For creek its 3,000,000/1,000,000+(800,000+100,000)*[1/1.60] = 1.92.

The fixed payment coverage ratio indicates the ability of the firm to pay its fixed obligations for a specified period of time. This figure includes the principal plus interest amount owed to creditors. The higher the ratio the safer creditors are from receiving amounts owed to themselves. Since the industry ratio is 1.82, Creek is in slightly good shape.

RECOMMENDATION

The recommendation is that Springfield bank should grant Creek enterprises the loan. The only below average ratio was the Time Interest Earned, and it tells us that Creek can indeed pay interest payments, just not at a high level as other companies. The other two ratios, Debt and Fixed payment, tells us that despite...