Business Management Case – G.E. Capital

For the case of GE Capital Canada, Clark Carriers submitted a request for a loan amounting to $270000. It was first confirmed that Clark Carriers met the minimal requirements set out by the commercial equipment financing division of GE for loans. Cash flow was then analyzed to ensure that Clark Carriers has sufficient cash flow from operations to make payments on current loans. Next the financial ratios were analyzed to ensure that Clark Carriers was efficient in its profitability, liquidity, stability, efficiency and growth in which they proved to achieve positive outcomes in all areas, especially profitability. Preceding that, the projected financial statements of 2003 were created and analyzed to include the new potential loan to display how the new equipment and contract will benefit Clark Carriers financial position. After thorough analyzing of all of these aspects of Clark Carriers, my decision on the matter was that Clark Carriers should be granted the loan from GE Capital Canada and this report should now be submitted to the senior account manager.

Problem Statement
An existing client of GE Capital Canada, Clark Carriers Ltd. submitted a request to the Commercial Equipment Financing Division of GE for an additional loan amounting to $270000 to finance the purchase of two new freightliner transport trucks, four new 53-foot trailers and four new mobile satellite systems. Assistant account manager Steve Rendl at GE must review Clark Carriers financial situation and have a report ready to be submitted to the senior account manager with his decision to approve or deny the loan and the reasons for doing so. Sub-Problems

1. The commercial Equipment Financing Department at GE Capital Canada does not deal with companies who have been in business for less than 3 years. It needs to be ensured that Clark Carriers has more than 3 years running. 2. It must be shown that Clark Carriers can generate enough cash flow to cover the monthly interest payments on the new loan on top of the payments for the previous loans it still has. 3. Clark Carriers debt to equity ratio cannot exceed 4:1 after the inclusion of the bank loan in the financial statements. 4. Clark Carriers must have the capacity to cover 10% of the costs of the assets wanting to be purchased through the bank loan as CEF will only cover 90% of the value of the desired asset. This means that Clark Carriers must be able to finance $30000 of the $300000 purchase. 5. The character of business owners, economic conditions, and collateral assets must also be analyzed before granting the loan. 6. Financial statements and projected financial statements need to be analyzed to ensure the continuing profitability of Clark Carriers with the requested loan.

Analysis
Clark Carriers Ltd.
Cash Flow Statement
December 31 2000 – December 31 2002
Operating Activities
Net Income$56999
Other Receivables$53
Prepaid Expenses$1172
Accounts Payable$13,631
Accounts Receivable($20092)
Total Cash Flow from Operations$51763

Financing Activities
Loan (Newcourt)$189000
Loan (GE Capital)$36000
Total Cash from Financing$225000

Investing Activities
Trucks & Trailers($368800)
Computer($3200)
Accumulated Depreciation$91360
Total Cash Flow from Investing($280640)

Throughout the 24 month period from December 31st 2000 to December 31st 2002 Clark Carriers had sales of $1480412. From the cash flow statement we can see that from these sales that $51763 in cash flow from operations was generated. At the end of 2002 total liabilities were recorded to be $252307 with yearly interest rates of approximately $12615. Although this cash flow in operations is not a substantially large amount of money we can see that this cash flow is sufficient enough for Clark Carriers to cover their debt payments and interest.

Financial Statement Ratio Analysis
Profitability
Return on Equity
Over the recorded 24 month time period, return on equity has increased substantially to 52.6%, much about the industry average of 30.2%. A high return on equity compensates investors for the use of their capital and for the riskiness that is involved with their investment. Clark Carriers 52.6% return on equity shows that management is effective in handling the company’s business resources and this is good in the eyes of lenders when loans are being considered.

Stability
Debt to Equity
Debt to equity has increased for Clark Carries over the 24 month time period from 0.23:1 to 2.2:1. Compared to the industry average of 1.56:1 Clark Carriers ratio is higher, which is not a positive thing with debt to equity ratios. It is unfavourable to have a higher debt to equity ratio as it means the company is more highly leveraged. Since Clark Carriers has an increased debt in relevance to its equity the creditor would have a smaller potential claim on the company’s assets, making loaning less attractive to creditors.

Interest Coverage
Interest coverage for Clark Carriers has increased substantially from 1X to 5.5X which is an extremely positive increase. This ratio shows how many times the company’s earnings can pay the interest on the debt it owes. Since Clark Carriers interest coverage is so high it indicates to lenders that there is a minimal risk and that Clark Carriers does in fact have to potential capacity for an increase in loans.

Liquidity
Current Ratio
This ratio is a measure of Clark Carriers short term liquidity and their ability to pay off short term liabilities quickly if needed. Clark Carriers current ratio decreased over the 24 month time period from 3.4:1 to 2.3:1, however this is still an efficient current ratio. It means that for every dollar in current liabilities, there is $2.3 in current assets. Although this ratio has decreased throughout the 24 months, it is still above the industry average and gives Clark Carriers a sufficient safety net if they were put in a situation in which they needed to liquidate current assets to quickly pay off current liabilities.

Acid Test Ratio
This ratio is similar to current ratio as it is a measure of short term liquidity, however acid test ratio is a more accurate measure of immediate liquidity. Clark Carriers acid test ratio has also decreased, however it is still 1.7:1 which once again is above the industry average and means that for every $1 of current liabilities there is $1.7 in immediate liquefiable current assets. Clark Carriers therefore has sufficient amounts of liquefiable current assets if current liabilities were needed to be paid.

Working Capital
This liquidity ratio measures the excess dollar amount of current assets in Clark Carriers over current liabilities. Their working capital has slightly increased over the 24 month time period being analyzed to $34421. This ratio varies on the size of the company, however Clark Carriers working capital is positive, meaning that they have a heightened ability to meet its current liabilities.

Efficiency
Age of Receivables
Clark Carriers age of receivables has majorly decreased from 40 days to 10 days over the 24 month time period which is significantly lower than the industry average of 42.6 days. The greater the age of receivables is the more money would be required for Clark Carriers to operate. Since Clark Carriers age of receivables is low it needs less cash to operate as it collects its receivables quicker than the average transport truck business.

Age of Payables
Clark Carriers age of payables has also decreased substantially from 34 days in 2000 to 19 days in 2002, which is a positive decrease for the company. This indicates that Clark Carriers has improved their ability to pay their payables faster and more efficiently helping their credit. This shows as well that the management is doing a proper job in managing their accounts payable and that they are saving money by taking advantage of credit discounts for fast repayments.

Growth
Sales Growth
A sale for Clark Carriers from 2000 to 2001 saw a major increase of 219% and continues to increase from 2001 to 2002 at 29.5%. Although sales are slowing in growth they are still experiencing growth in their sales which is a positive attribute for a company.

Profit Growth
Clark Carriers has experienced immense profit growth in both the 2000-2001 periods and the 2001-2002 periods with profit growth of 484.7%. This is an extremely impressive profit growth. It shows us that the managers at Clark Carriers have achieved amazing improvements of overall efficiency of the company’s operations and has seen a substantial increase in profits.

Asset Growth
Asset Growth for Clark Carriers grew 385.6% in 2000-2001 but then in 2001-2002 saw little asset growth. This could be attributed to the current trucks working at their full capacity. This is a key indicator to Clark Carriers that they are in need of a new equipment to continue to experience growth.

Projected Financial Statements

Clark Carriers Ltd.
Projected Statement of Earnings
Year Ending December 31st, 2003

Revenue30%-60% growth from 2002, average$1211177
Cost of Sales62% of Sales $750930
Gross MarginRevenue – Cost of Sales$460248

Operating Expenses
Salaries & WagesIncrease of $60000$80259
General & AdministrationIncrease of $13000$21512
Telephone & Fax1.1% of Sales$13323
Legal & AccountingUnchanged from 2002$1491
Travel & Auto1.1% of Sales$13323

Rent & UtilitiesUnchanged from 2002$10075
Bank Charges & InterestIncrease of $1300$35805
Bad Debts0.2% of Sales$2422
Depreciation ExpenseIncrease of $30000$72795
Advertising and Promotion0.1% of Sales$1211
Meals & Entertainment0.1% of Sales$1211
Total Operating Expenses$253427

Net Earnings before taxes$206821
Income Tax45% of Net Earnings before Taxes$93070
Net Earnings after Taxes$113751

Clark Carriers Ltd.
Projected Statement of Retained Earnings
Year Ending December 31st, 2003

Beginning Retained Earnings$56845
Add: Net Earnings after Tax$113751
Ending Retained Earnings$170596

Clark Carriers Ltd.
Projected Balance Sheet
Year Ending December 31st, 2003

Assets
Current Assets
CashBalancing Number$73117
Accounts Receivable18 Days’ Revenue$59724
Other ReceivablesNo Change$429
Prepaid ExpensesNo Change$15065
Total Current Assets$148335

Long-Term Assets
Trucks & TrailersAdd cost of new trucks and trailers$763800
FixturesNo Change$5480
Less Accum. DepreciationAdd Depreciation for new equipment$216556
Total Long-Term Assets$552724
Total Assets$701059

Liabilities
Current Liabilities
Accounts Payable19 Days Cost of Sales$39083
Bank Line of CreditAdd 10% coverage of purchase$30000
Total Current Liabilities$69083

Long-Term Liabilities
Loan (Newcourt)Decreased from $7000/month payments$105000
Loan (GE Capital)New loan amount less payments$296400
Total Long-Term Liabilities$401400
Total Liabilities$470483

Equity
Share CapitalNo Change$60000
Retained Earnings2002 + 2003 net Earnings$170576
Total Equity$230576
Total Equity & Liabilities$701059

CEF’s Minimal Lending Requirements

1) Clark Carriers Ltd. has been in business since 1987 which is a total of 16 years meeting the minimal requirements of three years in business set out by CEF. 2) As displayed in the Cash Flow Financial Statement for Clark Carriers, they have sufficient cash to cover the monthly loan payments of $5625. 3) New loan of $270000 inclusive, Clark Carriers debt to equity ratio is 2.27:1 which complies with the requirement of it not exceeding 4:1. With the increased retained earnings that came from the purchasing of the new equipment with the loan, Clark Carriers debt to equity ratio does not alter much from its 2002 figures prior to the consideration of the loan. 4) Clark Carriers must cover $30000 of the $300000 asset purchase due to the fact that CEF will only finance 90% of the purchase of an asset. Clark Carriers has stated that this $30000 will be taken from their bank line of credit. 5) Character of Business Owners

Doug and Annette Clark have been in business together for the entirety of the company’s lifespan. Doug was a mechanic and driver while Annette managed accounting. They had survived the economic recession and managed to keep their business afloat. They have never been late with a loan payment previously, despite undergoing tight financial situations. They have experience in business expansions as they had previously expanded to accommodate a contract in 2001 and the expansion was successful and profitable.

Economic Conditions
After the recession in 1989 that caused the bankruptcy of many trucking companies, the transportation industry recovered and has experienced strong growth, but prices are still low. This requires the trucking companies to rely more heavily on high volume of business in order to generate profits. In order to achieve this it is advisable for trucking companies to purchase more trucks and trailers to expand the capacity of business.

Collateral
Clarks Carriers has used $50000 of personal assets to secure the bank loan but they have not declared any assets on the balance sheet as collateral. With no assets pledged against the loan as collateral the bank has no collateral to rely on in the case that Clark Carriers was facing bankruptcy.

Decision
Based on all of the analysis’ presented in the statement above, my decision for the loan requested by Clark Carriers is that a loan of $270000 should be granted to them. Clark Carriers is in need of this loan for the financing of a purchase of two new trucks, four new trailers and four new satellite systems in order for Clark Carriers to have the capacity to increase their work load for a potential new contract. First off, Clark Carriers has successfully met all the requirements set out in CEF’s minimal lending requirements as discussed above. This is the basis of the loan acceptance before additionally analyzing the financial statements. As shown above in the cash flow statement, Clark Carriers has sufficient cash flow to cover its current debts and with the added income of the new contract to its net income this cash flow will be in greater abundance for aiding in the required payments of the larger loan from GE. Looking now at the financial ratios, it can be seen that they have achieved efficiency in all the areas of profitability, stability, liquidity, efficiency and growth. A key factor to look at is the impressive growth in profitability, showing that the company managers have achieved great overall efficiency within the business and can predict to see a continual growth in profits, especially with the potential new contract.

The final items that were analyzed were the projected financial statements for 2003 with the inclusion of the requested $270000 loan from GE Capital. First looking at the Projected Statement of retained earnings, we can see that with the purchase of the new equipmentrevenues  for Clark Carriers has increased substantially. Although the new equipment also comes with numerous added expenses, we can see that the net income after taxes has still increased quite heavily for the company and proves that the added expenses do not result in Clark Carriers to end up with a net loss rather than a net income. Moving forward to look at the projected statement of retained earnings, we can see that retained earnings as well, have increased steadily adding to Clark Carriers capital worth. Finally looking at the projected balance sheet, the main concern was that after the addition of the loan and new equipment that cash was still in surplus and was not a deficit. Through all the estimated values cash has been shown to in fact be in surplus and there are no blatant warning signs to lead us to believe that Clark Carriers is not in the financial position to handle the debt. Due to all the analysis above and explained here my decision is to grant Clark Carriers the loan they have requested of $270000.