The T. P. Jarmon Company manufactures and sells a line of exclusive sportswear. The firm's sales were $600,000 for the year just ended, and its total assets exceeded $400,000. The company was started by Mr. Jarmon just 10 years ago and has been profitable every year since its inception.
The chief financial officer for the firm, Brent Vehlim, has decided to seek a line of credit from the firm's bank totaling $80,000. In the past, the company has relied on its suppliers to finance a large part of its needs for inventory. However, in recent months tight money conditions have led the firm's suppliers to offer sizable cash discounts to speed up payments for purchases. Mr. Vehlim wants to use the line of credit to supplant a large portion of the firm's payables during the summer, which is the firm's peak seasonal sales period.
The firm's two most recent balance sheets were presented to the bank in support of its loan request. In addition, the firm's income statement for the year just ended was provided. These statements are found in the following tables:
T. P. Jarmon Company
Balance Sheets, December 31, 2015 and 2016

T. P. Jarmon Company
Income Statement for the Year Ended December 31, 2016

Jan Fama, associate credit analyst for Merchants National Bank of Midland, Michigan, was assigned the task of analyzing Jarmon's loan request.
Calculate the following financial ratios for 2016:
Ratio Norm
Current ratio ......................................... 1.8
Acid-test ratio ....................................... 0.9
Debt ratio ............................................. 0.5
Times interest earned ............................... 10.0
Average collection period .......................... 20.0
Inventory turnover .................................. 7.0
Return on equity .................................... 12.0%
Operating return on assets ......................... 16.8%
Operating profit margin ............................ 14.0%
Total asset turnover ................................. 1.2
Fixed asset turnover ................................ 1.8
a. Which of the ratios calculated in part a do you think should be most crucial in determining whether the bank should extend the line of credit?
b. Use the information provided by the financial ratios and industry-norm ratios to decide if you would support making the loan. Discuss the basis for your recommendation.

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Marketable securities Accounts receivable 5 Total current assets Net plant and equipment 286,000 270,000 Accounts payable Notes payable $ 48,000 Total current liabilities $160,000 $150,000 Common stockholders' equity Total liabilities and stockholders' equity Sales (all credit) Less: Cost of goods sold Gross profit Less: Operating and interest expenses General and administrative Intere st Depreciation Total operating and interest expense Earnings before taxes Less: Taxes Net income available to stockholders Less: Cash dividends Change in retained earnings $600,000 460,000 $140,000 $30,000 10,000 30,000 70,000 $70,000 27,100 $ 42,900 common 31,800 $11.100