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Financial Management Principles
Businesses often assume their credit score is worse or better than the actual position. A creditor needs to know the ability of the business to repay its obligations. Evaluation of creditworthiness assists decision-makers to know whether to extend credit or not. It also helps in deciding on the interest rate and fees to charge. Similarly, current creditors need to know the changes in the financial position of an entity to decide whether to raise credit limit or interest rates (Leonard and John 7).
Therefore, it is necessary to evaluate the creditworthiness of an entity. During such evaluations, creditors need to know how much debt can be realistically paid from the revenue of the business, duration, and profitability of the business, the existing credit and various credit limits, assets of the business, and financial stability of the business among others (Leonard and John 7). Various attributes of financial analysis form the basis of the evaluation. Evaluation entails the use of ratios. Comparison can be with industry averages or performance of other businesses. This treatise analyses the creditworthiness of Abel Athletics.
Profitability
This section looks at the revenue of the business. Net income for the business was $2,371,950. The net profit margin was 26.4%, the gross profit margin was 58.2%, the operating profit margin was 40.5%, and the return on assets was 23.1%. All the profitability ratios are above the industry average. Therefore, we can conclude that the business was profitable (Vance 23).
Liquidity ratios
The current ratio was 1.45 while the quick assets ratio was 0.33. Both ratios are above the industry rate. However, they are low than ideal rates. The ideal current ratio should be 2 while the quick ratio 1. This may imply that the firm may not adequately meet obligations which fall due within a year. However, due to the nature of goods and services traded in that industry, it might not be possible to hold several assets as current assets (Vance 23).
Capital structure and debt ratio
The debt ratio for the business was 82.5%, the debt to equity ratio was 97.4% and the interest coverage ratio was 14.55. The ratios are more than the industry ratios. Even though the current assets of the business could not adequately cover the current liabilities, the total assets, and equity well cover the total liabilities. The interest coverage ratio was 14.55. This is way below the industry average of 25.5. The ratio measures the number of times an entity can make interest payments on its debt portfolio with its earnings before interest and taxes. The ideal ratio should be more than 1.5. An extremely low-interest coverage ratio implies that the business has a high debt burden. This may indicate bankruptcy as the business is unable to meet its obligations (Haber 76).
Conclusion
From the activity ratios, it is imperative to note that the level of activity of the business is above the industry averages. The average payment period is more than twice the industry averages. From the above discussion, the business is profitable and credit-worthy. It is also necessary to note that most of the ratios for the business are above the industry averages. A creditor needs to evaluate the performance of the entity for some time. This would enable the monitoring of the stability of the company. It would assist in knowing if the performance reported in this year is sustainable.
Works Cited
Haber, Jeffry. Accounting dimistified. New York: American Management association, 2004. Print.
Leonard, Robin, and L. John. Credit repair, USA: Margaret Livingstone, 2010. Print.
Vance, David. Financial analysis and decision making: Tools and techniques to solve. United States: McGraw-Hill books, 2003. Print.
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