Purpose To help you understand the importance of financial statement
Purpose: To help you understand the importance of financial statement analysis in the operation of a small business.
You just returned from a meeting with your bank loan officer and you were a little taken aback by his comments. You’ve been doing business with this bank for a number of years and he always seemed happy with your company’s performance. This is why you can’t understand the bank’s hesitation to continue extending credit to your company. At this meeting, you had supplied him with the current year’s financial information and even ran some of the financial ratios that you know the bank asks about. You thought the numbers looked decent for the current year, maybe not the best, but decent. Sure, sales had fallen a little bit since the previous year, but they were still pretty good. So when the discussion turned to a comparison of the last couple of year’s financial information with this year’s, you had to question what that has to do with anything. “Why shouldn’t each and every year stand by itself?” you asked the banker. His comments to you were, “A company’s performance is best evaluated by examining more than one year’s data. This is why most financial statements cover at least two periods. In fact, most financial analysis covers trends of up to five years.” He also said that a company’s performance is best evaluated by comparing it against its own past performance, the performance of competitors, and the industry averages for the industry the company is in.
Below are some selected financial data from the last four years. Calculate the trend percentages using 2011 as the base year and the return on sales for these four years and see if you can figure out what the concern is that the banker has for the financial health of your company.
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