Case-2 : Financial Ratio Analysis

Case scenario :

Pacilfic Garments Ltd., a ready-made garments exporter has applied to your bank for renewal and enhancement of its working capital facility from Tk. 6.00 crore to Tk. 9.00 crore. The client claims that they have secured a large export order from a new European buyer. You reviewed their audited financials for the last year, which showed the following information :

(i) Current Ratio: 1.08
(ii) Quick Ratio: 0.75
(iii) Debt Equity Ratio: 3.0
(iv) Net Profit Margin: 1.6%
(v) Inventory Turnover: 2.8 times
(vi) Accounts Receivable Collection Period: 90 days.

Tasks :

The client has regular repayment behavior, but has not submitted updated stock and receivables reports in the last two quarters. No overdue exists at present. As the credit officer, assess the financial health of the borrower using ratio analysis and provide recommendations on the renewal and enhancement request.

Questions :

(a) What do the above financial ratios indicate about the liquidity and solvency of the company?
(b) What are the risks involved in sanctioning an enhancement limit in the current financial condition?
(c) Suggest two credit risk control measures the bank can apply if he enhancement is approve.
(d) Based on your analysis, should the facility be renewed and enhanced? Justify.