F03 · Intermediate
F03 · Applied project
A credit review of Brightwater Bike Repair
Fictional case
December 2027. Mateo Ruiz has asked Harbour Credit Union for a second loan: $25,000 over five years to stock e-bikes and fit out an e-bike service bay. You are the credit union’s analyst. You have Brightwater’s first six months (July–December 2026) and its first full year (2027), whose statements you prepared in F02. In 2027 Brightwater moved to a bigger workshop, rented on a lease of a year or less (so, under ASC 842’s short-term exemption, there is no lease liability), opened a small shop and started selling bikes and accessories. Mateo works in the business and pays himself only through dividends. Everything about Brightwater and the credit union is fictional.
| July–December 2026 (6 months) | 2027 | |
|---|---|---|
| Repair revenue | 31,800 | 70,500 |
| Retail sales revenue | — | 25,200 |
| Sales returns and allowances | — | (600) |
| Net revenue | 31,800 | 95,100 |
| Cost of sales: mechanics’ wages | 9,540 | 33,600 |
| Cost of sales: parts and supplies used | 3,950 | 7,980 |
| Cost of sales: cost of goods sold | — | 14,740 |
| Gross profit | 18,310 | 38,780 |
| Operating expenses (rent, utilities, advertising, insurance, depreciation, card fees, bad debts, loss on equipment) | 10,160 | 27,538 |
| Operating income (EBIT) | 8,150 | 11,242 |
| Interest expense | 150 | 850 |
| Income tax expense (25%) | 2,000 | 2,598 |
| Net income | 6,000 | 7,794 |
| Depreciation (included above) | 480 | 2,385 |
| Dividends paid to Mateo | 1,650 | 4,800 |
| 2026 | 2027 | |
|---|---|---|
| Cash | 17,450 | 14,379 |
| Accounts receivable, net | 2,720 | 6,073 |
| Inventory | — | 5,120 |
| Supplies and prepaid insurance | 880 | 1,030 |
| Total current assets | 21,050 | 26,602 |
| Equipment, net | 4,320 | 9,810 |
| Total assets | 25,370 | 36,412 |
| Accounts payable | 1,180 | 2,050 |
| Other current liabilities (wages, interest, unearned revenue, income tax) | 2,840 | 3,018 |
| Notes payable due within a year | 5,000 | 3,000 |
| Total current liabilities | 9,020 | 8,068 |
| Notes payable (noncurrent) | — | 9,000 |
| Total liabilities | 9,020 | 17,068 |
| Common stock | 12,000 | 12,000 |
| Retained earnings | 4,350 | 7,344 |
| Total equity | 16,350 | 19,344 |
| July–December 2026 | 2027 | |
|---|---|---|
| Net cash from operating activities | 6,900 | 3,029 |
| Equipment bought | (4,800) | (9,000) |
| Equipment sold | — | 700 |
| Stock issued, borrowing and repayments | 17,000 | 7,000 |
| Dividends paid | (1,650) | (4,800) |
| Cash at the end | 17,450 | 14,379 |
Credit sales (repairs invoiced to the courier company, the rental fleet and regulars, the only sales on credit, due in 30 days): $9,900 in July–December 2026 and $26,800 in 2027. Of the $6,500 of receivables at 31 December 2027, $2,300 is overdue.
| Measure | Median |
|---|---|
| Current ratio | 1.8 |
| Quick ratio | 0.9 |
| Liabilities to equity | 1.2 |
| Interest coverage (EBIT ÷ interest) | 5.0 |
| Days sales outstanding, on credit sales | 22 days |
| Days inventory outstanding | 70 days |
| Gross margin | 42% |
| Operating margin | 8% |
| Net margin | 5% |
| Return on assets | 8% |
| Return on equity | 16% |
| Cash from operations ÷ net income | 1.1 |
| Dividends ÷ net income | 35% |
The credit union’s borrowers keep their accounts as Brightwater does, with mechanics’ wages in cost of sales.
| Item | Detail |
|---|---|
| Amount and use | $25,000, drawn on 1 January 2028: $15,000 of e-bikes for sale and $10,000 for an e-bike service bay |
| Terms | 8% a year, five years: $5,000 of principal each 31 December from 2028, with the year’s interest |
| Existing loan | $12,000 at 7.000000000000001%, $3,000 repaid each 1 March from 2028, interest paid yearly |
| Covenant: current ratio | at least 1.5 |
| Covenant: debt to equity (interest-bearing debt ÷ equity) | at most 2.0 |
| Covenant: interest coverage (EBIT ÷ interest) | at least 3.0 |
| Covenant: dividends | at most 50% of the year’s net income |
Work through the stages: what changed, how liquid and efficient Brightwater is, how much debt it can carry, what it earns on its capital, how good its earnings are, and then your recommendation. Use the July–December 2026 figures with care: six months, and a business that has since changed.
What you will produce
- Growth and common-size margins for the two periods, adjusted for the six-month first period, with the main cause of the change in margin.
- Liquidity and efficiency ratios against the credit union’s benchmark, with the receivables and inventory days explained.
- Solvency now and pro forma with the new loan, tested against each covenant, and the headroom on the tightest one.
- Return on equity broken down by the DuPont method, compared with the benchmark, with what drives the difference.
- Cash-flow quality (cash from operations against net income, free cash flow, dividends) and Altman’s Z″.
- A recommendation memo to the credit committee: lend or not, on what terms and conditions, and what to monitor.
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