Chris Miller knew that he would obtain $190,000 from his personal saving and loans from friends but required $510,000 purchase price for the practice. Miller is in need of information on his likelihood of obtaining a bank loan. Miller does not have any experience in running his own business but has decided to run one because of the experience he has gained in the practice having worked for three different dental practices. It is recommendable for Chris Miller to use the past financial performance – financial ratios of Chang Dental Clinic as well as his financial forecasts to convince the bank to loan him the required funds to purchase the dental practice. The past financial performance of Chang Dental Clinic will be useful to the bank in determining the financial performance and the capacity of the clinic to repay its debts which will then help it to determine whether to loan Miller or not.
Past financial performance of Chang Dental Clinic
1. Financial ratios
Miller should use the past financial performance of the clinic to convince the bank to loan him the required funds to purchase the practice. Liquidity ratios show the financial performance of the firm and also show the healthy level of the firm. The reason as to why Miller should use the liquidity ratios for the clinic is because the loan will be repaid by the money that will be obtained from the clinic. The performance of the clinic will determine its ability to repay the loan once it is granted to Chris Miller who will be the proprietor and owner of the clinic. Some of the important financial ratios which Miller should present to the bank are as follows: Ratio 2005 2004 2003 Current ratio 0.8 0.7 0.7 Net profit margin 32.5% 31.2% 29.4% Debt Ratio 11.12% 12.23% 27.3% Acid test ratio 0.7 0.6 0.6 Return on assets 18.1% 15.5% 13.5% Return on equity 95.9% 88.7% 75.2% Current ratio and acid test ratio show the ability of a firm to pay for its short term liabilities. The short term assets of the clinic are able to pay for its short term liabilities since the financial ratio are more than 0.5. The debt ratio for the company has reduced significantly from 2003 to 2005. Debt ratio compares the total debt of a company to its total assets. The low and reduced percentage for the clinic indicate less risk for the clinic and that the clinic is heavily dependent on leverage and that the clinic has a stronger equity position. Increasing net profit margin or positive trend in net profit margin for Chang Dental Clinic is an indication if increased profitability. Return on assets illustrates how a firm’s management is using it assets in profit making. The increase in the return on assets for the clinic during the last three years means that the clinic has been efficient in making a profit from its assets. Return on equity indicates the profitability level of a company and measures how much the shareholders have earned for investing their money in the firm. Return on equity for the clinic has increased significantly for the previous years and indication that the clinic’s management was efficient in utilizing its equity base for better returns to its investors. Based on the above financial analysis, Chris Miller will be armed to the tooth with the enough information to convince the loans manager of his eligibility for financing. The financial performance of the clinic has been overwhelming, and this will make Miller qualify for bank financing. The following are some other key ratios which the loan manager will put in consideration before granting the loan to Miller: Ratio 2005 2004 2003 Fixed asset turnover 15.3 13.9 12.8 Total asset turnover 4.7 4.8 5.9 The significant increase in the fixed asset turnover