# Financial Ratios Used in BRR February 11, 2009 1:00 – 2:30 PM.

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Financial Ratios Used in BRR February 11, 2009 1:00 – 2:30 PM

Financial Condition of Owner FCO) FCO answers the question: What is the owners capacity to put in more money when needed by the business? It is the ratio between Personal Networth and Total Liabilities. Personal networth will exclude: Investment in the borrowing enterprise Personal assets mortgaged or used as collateral for loan/s

Exercise to Compute FCO For single proprietor Mr. Santos: Personal networth P4,000,000 2 vehicles mortgaged to SB P 850,000 Investment in enterprise P1,250,000 Total Liabilities P 750,000 Compute: the Financial Condition of the Owner. What is the equivalent BRR Score?

Answer: Personal NW – Mortgaged Assets – Investment in the Enterprise divided by total loans payable = 4,000,000 – 850,000 – 1,250,000 750,000 = 1,900,000 divided by 750,000 = 2.53 = Score of 4 points

There is an additional loan being evaluated in SB Corporation for P500,000. FCO Computation: = 1,900,000 divided by 1,250,000 = 1.52 = Score of 3

FCO for Corporations With more than 1 major stockholder: get the total networth of all the major stockholders. The guidelines for single proprietorships shall thereafter apply. Divide the net networth by the firms total loans payable including the proposed SB loan.

. NameNetworth%Assets with Mortgage Inv. in Business Abner1.500 Mn5500,00050,000 Dario2.000 Mn30750,000300,000 Harold.500 Mn1-10,000 Robert2.000 Mn30500,000300,000 Rowena2.000 Mn34 500,000340,000

Answers to the Exercise: 1. Major stockholders are Dario (30%), Robert (30%) and Rowena (34%) 2. Computation of individual networth for FCO : Dario: 2 Mn – 750,000 – 300,000 = 950,000 Robert: 2Mn – 500,000 – 300,000 =1,200,000 Rowena: 2 Mn – 840,000 = 1,160,000 Total 3,310,000

Assume: a) Liabilities of P750,000 b) SB loan application of P1M 3. FCO for the corporation = 3,310,000 divided by 750,000 (the sum total of the liabilities of the firm) = 4.41 Score: 5 points Including the proposed SB loan of P1,000,000: 3,310,000 divided by 1,750,000 = 1.89 Score: 2 points

Computation of FCO: Networth Mortgaged Inv. in Assets Enterprise Dario 2.00 Mn 750,000 300,000 Robert2.00 Mn 500,000 300,000 Rowena2.00 Mn 500,000 340,000 Total 6.00 Mn 1,750,000 940,000 Total O/s Loans P750,000 Net networth of the group P3,310,000 3,310,000 divided by 1,750,000 = 1.89 BRR Score equivalent = 2 points

Financial Ratios Determine the Health of a Company Expressions of relationships between items in the F/S. When properly interpreted, are useful indicators of financial condition and performance Could indicate the liquidity, solvency, or profitability of a business.

Some Ratios used in BRR Current Ratio: Current Assets Current Liabilities Excl. long overdue ARs and obsolete Inv. Debt-Equity Ratio: Debt (TL/TA) Equity (TC/TA) Debt + Equity is always equal to 100% or 1.

Some Ratios Used in BRR Debt Servicing Capacity: Net Income – Drawings/Dividends+ Interest + Depreciation divided by the principal and interest amortizations of LT and ST loans for one year Accounts Receivable Level: AR/Sales x 360 days = AR level

Exercise: SB Merchandise Trading Assets Cash 150,000 AR* 200,000 Inventory 100,000 Other Assets 550,000 Total 1,000,000 *P20,000 is long overdue Liabilities & Capital Accts. Pay. 75,000 Notes Payable 250,000 Capital 675,000 Total 1,000,000

Additional Information: Sales P2,500,000 Net Income P450,000 Interest P50,000 Depreciation P50,000 Business Location Baguio City Single Parent with 1 child Loan application for P1M, 3 yrs., amort. of P33,600 (P27,800 for principal & P5,800 interest)

Compute the ratios and the equivalent scores under BRR: Current Ratio Debt-Equity Ratio Debt Servicing Capacity Accounts Receivable Level Please use BRR Scorecard on page 23 - 25 as reference for the scores for each factor.

Computation of Current Ratio: Cash 150,000 AR* (200,000-20,000) 180,000 Inventory 100,000 Total Current Assets 430,000 Total Current Liabilities 325,000 CR = 430,000 = 1.32 325,000 Score = 3 points

Computation of Debt Equity Ratio: Total Liabilities divided by Total Capital Total Assets = 325,000 divided by 675,000 1,000,000 1,000,000 = 32.5:67.5 Score = 7.5

Computation of DSC DSC = NI – Drawings/Dividends+Int.+Depn Prin. & Int. Amort. LT & Int. on ST Loan = 450,000-150,000*+50,000+50,000+69,600 333,600+69,600+50,000 = 469,600 * Baguio is urban; family of 453,200 of 2 persons; std. annual = 1.03 expenditure is P150,000 Score of 10 (p.70)

AR level P 2.5Mn divided by 360 days = 6,944.44 P200,000 divided by P6,944.44 = 29 days Score = 5 points P200,000/P2,500,000 x 360 = 28.8 or 29 days Score = 5 points

BRR Score on Cash Aspect (Maximum Points – 50) Score Points Current Ratio 1.32 2.0 Debt-Equity 32.5:67.5 7.5 DSC 1.04 10.0 AR level 29 days 5.0 Total Points 24.5

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