CREDIT APPRAISAL

THE FORTUNE TELLER- CASE STUDY

1. Kharag & Co. Vs. Sahil Kapoor & Brothers- credit period case

Current ratio: 2.49 1.52 Liquid Ratio: 0.57 1.17 Payment Period: 121days 89days

2. Delhi Based Co.- Bankruptcy case- MDA

3. Take over Case

MULTIPLE DISCRIMINANT ANALYSIS (MDA)

= 0.012 x (Net Working Capital/ Total Assets%) + 0.014 (Retained Earning/ Total Assets) + 0.033(EBIT/ Total Assets%) + 0.006 (Market Value of Total Equity/ Book value of Debt%)+ 0.999 (Sales/Total Assets) = 2.675

* Only for large companies whose shares are traded in stock exchanges

0.012 x (15%) + 0.014 (31%) + 0.033(13%) + 0.006 (107%)+ 0.999 (0.9) = 2.5841

2.5841 < 2.675

Credit Appraisal

Refers to the consideration of a fresh proposal for loan or an enhancement proposal for additional loan.

IMPORTANCE OF CREDIT APPRAISAL

1. To take Correct Credit Decision

2. To Decide the Quantum of Credit

3. To Ascertain the Ability to repay

4. To Find out liquidity, Profitability, Solvency of Concern

5. To judge the viability of project

Documents Necessary for Credit Appraisal

1. Balance Sheet2. Income statement3. Cost of Project in the case of new concern of for a

concern going in for expansion4. Means of financing the Project5. Cost of Production and profitability statements6. Cash flow statements covering the period of loan7. Projected Balances Sheet at the end of each financial

year during the period of loan8. Feasibility report of the Project

PROCEDURE FOR CREDIT APPRAISAL

EXAMINATION OF BUSINESS PLAN/PROPOSAL

SCRUTINY OF CASH FLOW STATEMENT- =Debt Service Coverage ratio=

=net profit(after tax)+ Interest on longterm debt+ depreciationInstallments of long term debt & deferred payments + Interest thereon

STUDY OF FUND-FLOW STATEMENT APPLICATION OF RATIO TECHNIQUE INTER-FIRM COMPARISON ANALYSIS OF MANAGERIAL COMPETENCE

LIQUIDITY ratiosCurrent RatioCurrent AssetsCurrent LiabilitiesIdeal ratio: 2:1

Acid Test RatioLiquid AssetsLiquid Liabilities Ideal ratio: 1:1

SOLVENCY RATIO

Debt Equity ratioOutsiders’ fundsShareholders’ fundsIdeal Ratio: 1:1

Equity RatioShareholders’ FundsTotal Assets

Profitability Ratio

Gross Profit RatioGross Profit * 100

Net Sales

Net Profit Ratio

Net Profit After Tax*100

Net Sales

Operating Profit Ratio

Profit Before Dep. Interest &Tax

Net sales

Return on NetworthNet Profit After Tax

Capital Employed

Net Profit to Fixed Assets Ratio

PBIT

Amount invested in fixed Assets

Activity Ratio

Stock Turnover Ratio=

Cost of goods Sold

Average Inventory

Debtors turnover Ratio

Credit Sales

Total Debtors

Average Payment Period

Creditors *365

Purchases

Fixed Assets Turnover Ratio

Sales

Fixed Assets