Bradburn Corporation Financial Analysis And Extension Reques

Bradburn Corporation Financial Analysis and Extension Request Evaluation

Bradburn Corporation was formed 5 years ago through a public subscription of common stock. Daniel Brown, who owns 15% of the common stock, was one of the organizers and is the current president. The company has been successful but is currently experiencing a shortage of funds. Brown approached Topeka National Bank requesting a 24-month extension on two notes due in 2015 and 2016. The company plans to finance a $300,000 plant expansion using internally generated funds over the next two fiscal years. The bank requested financial reports for the last two fiscal years to assess the request.

Financial Ratios and Analysis Calculations for Bradburn Corporation

In order to evaluate Bradburn Corporation's current financial health and the feasibility of its expansion plans, various key financial ratios and percentage changes need to be calculated based on the provided income statements and balance sheets for fiscal years 2014 and 2015. These include the current ratio, acid-test ratio, inventory turnover, return on assets, and percentage changes in sales, cost of goods sold, gross margin, and net income after taxes.

Current Ratio

The current ratio measures a company's ability to meet its short-term obligations and is calculated as:

Current Ratio = Current Assets / Current Liabilities

For fiscal years 2014 and 2015, the relevant current asset and current liability figures are to be obtained from the balance sheets. This ratio provides insight into liquidity position changes over time.

Acid-Test (Quick) Ratio

The acid-test ratio refines the current ratio by excluding inventories, which may not be quickly liquidated:

Quick Ratio = (Cash + Accounts Receivable + Marketable Securities) / Current Liabilities

This measure offers a stricter view of liquidity, especially critical given Bradburn's funding shortage.

Inventory Turnover

This ratio indicates how efficiently inventory is managed, calculated as:

Inventory Turnover = Cost of Goods Sold / Average Inventory

Computed for fiscal year 2015 to assess how quickly inventory is sold and replaced, which impacts liquidity and operational efficiency.

Return on Assets (ROA)

ROA evaluates how effectively the company uses its assets to generate profit:

ROA = Net Income After Taxes / Total Assets at end of the year

Figures for 2014 and 2015 are derived from the income statements and balance sheets. ROA trends reveal operational efficiency changes over time.

Percentage Changes in Financial Metrics

Calculations involve comparing fiscal year 2014 to 2015 data to find the percentage increases or decreases:

• Percentage change in sales and COGS: ((2015 figure - 2014 figure) / 2014 figure) x 100
• Gross margin change: ((Gross margin 2015 - Gross margin 2014) / Gross margin 2014) x 100
• Net income after taxes change: ((2015 net income - 2014 net income) / 2014 net income) x 100

Additional Financial Reports and Analyses

To further evaluate Bradburn's financial stability and repayment capacity, the bank should consider:

• Cash flow statements to review operational cash flow
• Debt service coverage ratio (DSCR) to assess ability to meet debt obligations
• Projected financial statements based on the assumed future percentage changes
• Break-even analysis to determine when the expansion will contribute positively to cash flow
• Capital budget and investment analysis to evaluate the viability of the expansion

Assessment of Financial Projections and Loan Extension Feasibility

Assuming that the percentage changes in sales and COGS observed between 2014 and 2015 will persist over the next two years, Bradburn's capacity to finance the $300,000 expansion using internally generated funds depends heavily on its profitability and cash flow stability. If profit margins and operational efficiency improve or remain steady, the company may generate sufficient reserves.

However, the significant investment required for expansion could strain liquidity, especially if revenues do not grow proportionally as assumed. The company's reliance on internal funds without external financing suggests confidence in its cash flow projections, but this approach may overlook unforeseen risks or market changes that could impact revenue growth.

From the bank's perspective, granting the extension hinges on the company's ability to demonstrate sustainable cash flows and adequate liquidity. The bank should analyze projected cash flows, assess the company's ability to service existing and new debt, and consider the potential risk of continued or worsened liquidity shortages.

Given the aggressive growth plan and current financial metrics, it is prudent for Topeka National Bank to conduct a comprehensive credit risk review, including stress testing projections. If the company's financials and cash flow forecasts are robust and show consistent profitability and liquidity, supporting the extension could be justified. Conversely, if there are signs of declining liquidity or profitability, the bank might consider additional collateral requirements or a more limited extension period.

In conclusion, while Bradburn's internal funding strategy appears optimistic, careful evaluation of detailed cash flow projections and risk assessments is essential before approving the note extension. The decision should balance the company's growth ambitions with the bank's risk appetite and the need to ensure timely repayment of existing obligations.

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