You are tasked to review the financial information provided on LMS Machinery & Equipment Pte Ltd LMS,
Question:
You are tasked to review the financial information provided on LMS Machinery & Equipment Pte Ltd “LMS”, in the capacity of a bank loan officer who is considering whether a loan of $200,000 should be granted to LMS. You are evaluating whether the entity would be able to generate enough cash flow to sustain its operations and settle their loan payments regularly.
Background
LMS is a company that specializes in selling new and used heavy construction equipment and machinery for the construction and engineering industry. In addition, it provides complementary services such as earthworks, service, and maintenance works. LMS has progressed well in its business, experiencing steady growth in sales since its incorporation on 1st January 2018, by owner Alan Fernandez. Alan had extensive relevant working experience in the construction industry. With his work experience and industry network, he has grown the business successfully; his concern was the limited space in LMS warehouse. With increase in sales growth, inventory has increased significantly to facilitate a standard of delivery service. Alan intends to extend the warehouse space which would cost $200,000 in the first quarter of 2021.
Market Place
Until the third quarter of 2020, LMS was the only distributor for equipment, machinery and tools for a major manufacturer. By the end of Year 2020, there were two new distributors with a relatively similar market reputation as LMS representing the same manufacturer in Asia. With competition stepping up, Alan was uncertain to what extent the competition would influence his business
Financial Projections For Business Growth Trajectory
Alan projects that sales for Year ending 31st December 2021 to be $2.8 million whilst Year ending 31st December 2022 would be $3.2m. These projections included confirmed contracts worth $2 million in Year 2021 and $2.2 million in year 2022, to supply machinery and equipment. He is confident that LMS reputation will enable him to clinch the remaining differences of $0.8 million in Year 2021 and $1 million for Year 2022 respectively.
Financial Situation of LMS Machinery & Equipment Pte Ltd
LMS succeeded in generating sales from clients and is always on the lookout for other business opportunities to scale and grow the company. The main constraint is the lack of space to store the projected increases in inventory of equipment and machinery. The additional warehouse space required by first half of Y2021, would cost $200,000. If this loan request of $200,000 was approved, principal payments amount to $40,000 per annum, starting from 1 February 2021; with annual interest payments at $13,000 per annum for the first 2 years. The existing Long Term Loan principal payment amount for Year 2021 and Year 2022 amount $36,528 and $71, 924 respectively. Whilst the annual interest payment amount for Year 2021 and Year 2022 amount to $36,528 and $71,924 respectively. As the business grew and expanded, LMS began to meet with liquidity and funding problems. There were a few issues that required the company’s attention:
• Working capital was required to purchase the inventory of machinery and equipment needed for sales.
• Suppliers have been putting pressure to reduce days of accounts payable.
• Long credit terms had been given to clients, resulting in high account receivables.
• Insufficient storage space to hold inventory of machinery, equipment and assets
LMS had been fulfilling the funding requirements through a combination of bank loans and personal investments into the equity of the company in the past years. However, without increase in a source of further financing, Alan is wondering whether LMS would be able to generate cash fast enough to cover its working capital requirement and debt payments over the next few years.
Financing from Bank
LMS had been enjoying business growth for the past three years and was looking forward to serving more clients as the business expanded. To sustain the operations and support the growth of the business, LMS planned to finance the company with a loan from the bank. The company estimated that it required $200,000 to support its growth plans. With a track record of timely interest payments during the previous years and a steady increase in profit, LMS submitted a loan proposal to the bank anxiously pending a favorable outcome.
Q1. Using the Profit and Loss Statement and Balance Sheet provided, analyze the trend of the company’s financial performance over the Years 2018, 2019 and 2020, with the Year 2018 as the base year.
Q2. Analyze the health of the cash position of LMS, regarding the operating, investing, and financing activities in the Cash Flow Statement over the Years 2018, 2019, and 2020.
Q3. Compute and compare the financial ratios of LMS against the industry average, and determine the level of Activity, Liquidity, Solvency, and Profitability of the company.
Future Financial Requirements
Q4. Based on LMS's projected Financial Statements for the years 2021 and Year 2022, would $200,000 be sufficient to fund their growth trajectory?
Funding Analysis
Q5. Based on your analysis conducted for Questions 1 - 4, determine whether you, as a bank loan officer, would grant the loan request to LMS. Please explain your reasons for the options you are going to provide to Alan.
Financial Accounting
ISBN: 978-1259103285
5th Canadian edition
Authors: Robert Libby, Patricia Libby, Daniel Short, George Kanaan, M