MBA FPX 5010 Assessment 3 Performance Evaluation
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Performance Evaluation
Student Name
Capella University
MBA-FPX 5010: Accounting Methods for Leaders
Dr. Khaled Ghany
May 16, 2023
Executive Summary
Ace Company is seeking a $3 million 10-year loan for the purpose of acquiring production equipment and developing accompanying software. In order to assess the suitability of granting the loan, several factors need to be evaluated, including the trend in account receivable collections, average inventory turnover rate compared to industry standards, and the short- and long-term creditworthiness based on financial performance and trends.
Accounts Receivable
Accounts receivable represents the outstanding amounts owed by customers who have made credit purchases and have agreed to pay within a specified period (Marshall, 2019). The financial data from the past three years, namely 2015, 2016, and 2017, indicate an upward trend in accounts receivable. The respective amounts for these years are $3.8 million, $3.9 million, and $4 million. Additionally, there has been an increase in cash received, from $1.8 million in 2016 to $2.547 million in 2017, which is a positive indication of timely payment for accounts receivable by Ace Company. While the accounts receivable turnover rate has shown a slight increase from 4.68 times in 2016 to 5.06 times in 2017, this can be attributed to the overall growth of the business as evidenced by the increase in net sales and decrease in the debt-to-equity ratio, indicating a favorable balance.
Inventory Turnover
Inventory turnover is a financial ratio that reflects how many times a company has sold and replaced its inventory within a specific period (Fernando, 2022). For Ace Company, evaluating their inventory turnover is crucial in determining pricing, manufacturing, marketing, and inventory replenishment strategies (Fernando, 2022). Over the past three years, Ace Company has experienced an increase in inventory levels. The inventory figures for 2015, 2016, and 2017 were $4.8 million, $5 million, and $6 million, respectively. This growth in inventory corresponds with the rise in sales from $18 million to $20 million between 2016 and 2017. Although the inventory turnover rate decreased from 1.94 times in 2016 to 1.82 times in 2017, this can be attributed to the increase in inventory value by $1 million. It is important to note that Ace Company’s current inventory turnover rate of 1.94 is significantly lower than the industry average of 10. However, the company has consistently shown an increase in profitability since 2015.
Creditworthiness
Assessing the creditworthiness of an individual or a company is crucial in determining the likelihood of defaulting on debt obligations (Dhir, 2022). Several factors, including assets and liabilities, are considered in this evaluation process. The total debt-to-equity ratio for Ace Company decreased from 3.78 times in 2016 to 2.49 times in 2017, indicating their ability to manage and repay debts efficiently. The times interest earned ratio, which measures the company’s current income in relation to its debt obligations and ability to meet them, is also favorable (Chen, 2022). Furthermore, the current ratio, which indicates the ability to cover short-term liabilities with short-term assets, improved from 1.53 in 2016 to 1.79 in 2017, indicating a strong capacity to fulfill short-term debt obligations (Folger, 2022).
Recommendation
Based on the evaluation of Ace Company’s financial performance and creditworthiness, it is recommended to approve the requested $3 million 10-year loan. Although there is a concern regarding the inventory turnover rate, the company has consistently demonstrated growth in profitability, accounts receivable, and favorable short- and long-term creditworthiness.
References
Ace Company Data. Capella University. (n.d.). Retrieved August 7, 2022, from https://courserooma.capella.edu/bbcswebdav/institution/MBA-FPX/MBA
FPX5010/191000/Course_Files/cf_ace_company_data.pdf
Chen, J. (2022, July 8). Understanding the times interest earned (tie) ratio. Investopedia. Retrieved August 7, 2022, from https://www.investopedia.com/terms/t/tie.asp#:~:text=The %20times%20interest%20earned%20%28TIE%29%20ratio%20is%20a,interest %20payable%20on%20bonds%20and%20other%20debt.%201
Dhir, R. (2022, February 8). Creditworthiness. Investopedia. Retrieved August 7, 2022, from https://www.investopedia.com/terms/c/credit-worthiness.asp
Fernando, J. (2022, July 28). Inventory turnover: Formula and calculation. Inventory Turnover. Retrieved August 7, 2022, from
https://www.investopedia.com/terms/i/inventoryturnover.asp
Folger, J. (2022, July 27). How do the current ratio and quick ratio differ? Investopedia. Retrieved August 7, 2022, from https://www.investopedia.com/ask/answers/062714/what-are-main differences-between-current-ratio-and-quick-ratio.asp
Marshall, D. (2019). Accounting: What the Numbers Mean (12th Edition). McGraw-Hill Higher Education (US). https://capella.vitalsource.com/books/9781260480719
PERFORMANCE EVALUATION 5 Appendix (Ace Company Data, n.d.)