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Loan Recommendation for Ace Company

Capella University

MBA-FPX5010: Accounting Methods for Leaders

Henry Weber

May 10, 2024

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Loan Recommendation for Ace Company

Executive Summary

This report contains a study of Ace Company’s performance in order to approve their 10

year loan of 3 million dollars that they asked for. This money is planned to be used in two major

ways: buying the production equipment and also developing software that goes along with it.

The study takes into account the company’s accounts receivable collections, inventory turnover

relative to industry peers, and if they are credit worthy based on short-term plus long-term

financial performance.

Accounts Receivable Collections Trend

A review of the accounts receivable collection trend shows there was a slight increase

from $4,200,000 last year to $4,500,000 the current year which means the company may have

more sales nowadays. This should be considered good news. However, it might also imply either

slower collection processes or longer credit periods (Murphy, 2024). Given the modest increase,

the trend is not alarming but warrants monitoring to ensure it does not deteriorate.

Inventory Turnover Comparison

Inventory turnover for Ace Company in 2022 is computed to be 1.92 times, a significant

decrease from the industry’s average 10 times per year. The discrepancy indicates that Ace

Company keeps its stocks longer than what is common in other firms hence such a practice may

result into increase in working capital needs as well as declining operating performance

efficiency. Previous year’s trend depicts a minimal drop from 2.0 times indicating that things
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have worsened from then. Better inventory control measures might as well lead to better

performance (Schwarz, 2024).

Creditworthiness Evaluation

Ace Company’s financial forecast for the years 2021 to 2022 highlights key growth

trends. Profitability has increased because revenue increased from $2,150,000 in 2021 to

$3,468,000 in 2022. However, the current ratio decreased from 1.68 to 1.37 over the same

period. This increase is a sign of liquidity challenges. Moreover, the total debt ratio decreased

slightly from 3.2 times to 3.08 times, indicating a step in reducing the level of debt. Ace

Company’s financial forecast for the years 2021 to 2022 highlights key growth trends. As noted

above, profitability increased because net income increased from $2,150,000 in 2021 to

$3,468,000 in 2022. However, the current ratio decreased from 1.68 to 1.37 over the same

period. This increase is a subtle sign of economic challenges. Moreover, the total debt ratio

decreased slightly from 3.2 times to 3.08 times, indicating a small step towards reducing the

level of debt.

Recommendation

Based on the analysis, it is recommended that the loan request by Ace Company be

approved. Ace Company’s loan will be effective in supporting growth, given its improving

profitability, stable leverage and strategic investments in production equipment and software

development. Nonetheless, it should be noted that the loan agreement should include covenants

that demand the raising of its inventory turnover ratio.

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References

Murphy, C. (2024, January 31). Receivables Turnover Ratio Defined: Formula, Importance,

Examples, Limitations. Investopedia.

https://www.investopedia.com/terms/r/receivableturnoverratio.asp

Schwarz, L. (2024, January 29). Inventory Control Defined: Best Practices, Systems, &

Management. Oracle NetSuite.

https://www.netsuite.com/portal/resource/articles/inventory-management/what-are-

inventory-management-controls.shtml
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Appendix 1
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Appendix 2