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Financial Ratios Used in BRR

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 owner’s capacity to put in more money when needed by the business? It is the ratio between Personal Networth and Total Liabilities.

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Financial Ratios Used in BRR

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

  2. Financial Condition of Owner FCO) FCO answers the question: What is the owner’s 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

  3. 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?

  4. 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

  5. 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

  6. 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 firm’s total loans payable including the proposed SB loan.

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  8. 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

  9. 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

  10. Computation of FCO: Networth Mortgaged Inv. in Assets Enterprise Dario 2.00 Mn 750,000 300,000 Robert 2.00 Mn 500,000 300,000 Rowena 2.00 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

  11. 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.

  12. 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.

  13. 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

  14. 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 Exercise: SB Merchandise Trading

  15. 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)

  16. 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.

  17. 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

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

  19. 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)

  20. 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

  21. BRR Score on Cash Aspect (Maximum Points – 50) ScorePoints • 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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