Debt analysis Springfield Bank is evaluating Creek Enterprises, which has requested a $ 3 comma 620 comma 000 loan, to assess the firm's financial leverage and financial risk. On the basis of the debt ratios for Creek, along with the industry averages and Creek's recent financial statements, evaluate and recommend appropriate action on the loan request.

if the debt ratio is lower,the loan request should be granted but if it is higher the loan request should not be granted by the bank.

Explanation:

Debt ratio is a financial ratio which shows the ability of a firm to pay their debt as they fall due.lenders are more concerned with the liquidity position of a firm in order to guarantee the solvency of the firm whenever a loan is granted to such a firm. The debt ratio is used to know the financial leverage of a firm and the financial risk involved in lending to such firm. When a firm is said to be highly leverage it means that such a firm will find it difficult to pay their debt as they fall due because the liabilities in their balance sheet is more than their assets. Debt ratio is calculated as

Total Liabilities/ Total Assets

The Debt ratio is calculated from the Liabilities and Asset figures obtained from their balance sheet. When it is calculated, lower ratio is more preferable than higher rato because it means that a firm will find it easy to settle their debt to their lenders as that debt fall due.but a higher ratio is an indication that such firm will not be able to meet their debt obligation to their lenders as they fall due. Therefore, when a firm has a higher debt ratio it is not advisable to grant a loan to such a firm by the bank. As regard the loan request of Creek Enterprises from Springfield bank, if the debt ratio of Creek Enterprises is lower, the loan should be granted but if it is higher the bank should not grant the loan.

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