Issues
1. Appraise the recent performance and financial position of Dawson Stores, Inc., using selected financial ratios as appropriate (Horizontal and Vertical analysis)
2. As Stefanie Anderson, would you conclude that the company is a good credit risk? If not, provide recommendations to the client on how to solve their issues.
Facts
Dawson Stores, Inc. was incorporated in 1881 by John Dawson Sr. After his death, tge stock had been widely spread since he divided his share among his five children and 14 grandchildren. John Dawson Jr. is now the president of Dawson Stores, Inc. His brother, Bill, is the Vice-president and Treasurer, and their two sisters and two cousins were the directors and officers. Dawson Stores, Inc. is a long time deposit custome of Springfield National Bank; since the years Dawson Sr. managed the company. Dawson Jr. is now requesting an unsecured line of credit of $1,000,000 for one year term. To support the company’s application, Mr. Dawson Jr. submitted the financial statements to the bank for the last four years. When Stefanie Anderson, the loan officer, received the financial statements along with previous bank records and she found the follow information: The deposit accounts at Springfield National Bank had average balances of $350,000 for the past year.
Dawson Stores, Inc. occasionally purchased Certificates of Deposit for short periods. The Company had not used bank credit in the last 10 years. A Recent Dun & Brandstreet (D&B) report requested by a business development officer reported all trade accounts satisfactory. Dawson Stores, Inc. operated seven stores for the past six years. All store locations have been modernized frequently, and the call report from the business development officer reported the premises orderly and well located for this chain of small retail stores. All seven stores were located within the trade area. In the opinion of the business development officer, there was little possibility for further business. Appendix A, B and C contains the financial statements that were given to Ms. Anderson for her analysis and review.
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The small and medium sector enterprises are considered an impetus to economic growth in any country since these enterprises are mostly labour intensive and they tend to boost the employment more than any other sector. The government of Pakistan has identified the SME sector as one of the leading sectors along with agriculture and construction that can generate employment and contribute to overall ...
For Account Receivables, retail customer accounts are written off in full when any portion of the unpaid balance is past due 12 months. Inventories are recorded at cost on the Last-in, First out (LIFO) method. Depreciation is computed using the straight-line for financial reporting purposes and accelerated method for tax purposes and other expenses that are included in operating costs. The long-term debt of is composed of mortgage loans from three savings institutions. There is no debt agreement that places restrictions on the company’s operations or financing.
Analysis
This study was conducted to determine if Dawson Stores Inc. would be a good credit risk for the unsecured Line of Credit loan request. Consideration of the company’s financial condition, character reference and loan security is important to make such decision. Three types of financial statement ratio analysis were performed: (1) The company’s profitability and ability to pay long-term debt, (2) The company’s liquidity and ability to pay current liabilities and ability to meet its short-term obligations, and (3) the company’s stock as an investment. The ratio analyses also reflect a Horizontal Analysis, a comparison of the ratios from 2007 to 2010. Financial statement ratio analyses were conducted based on the information given. Results are as follows:
Profitability
2007200820092010
Rate Return on Net Sales0.020.0170.030.035
Rate of Return on Total
Assets0.0320.030.0560.064
The Essay on Ratio Analysis Ratios Company Industry
... something about a company's activities, such as the ratio between the company's current assets and current liabilities or between its accounts receivable and its annual ... and sales growth of the company, the risk (or volatility in performance), the debt-equity structure of the company, the dividend policy, the ...
Rate of Return on
Stockholders’ Equity0.080.070.130.15
Earning per Share of
Common Stock3.553.286.678.54
Return on Assets (ROA) indicates management’s efficiency in using its assets to generate revenue. The higher the ROA number, the better, because the company is earning more money on less investment. Return on sales indicates the percentage of each sale dollar earned as net income. Dawson Stores, Inc. has low percentages of profitability. However, it has a good and increasing Earning per Share of Common Stock. Furthermore, the company has a record of increasing revenue, thus reflecting an increase in net income.
Long-Term Liquidity Ratios
2007200820092010
Debt Ratio0.59 0.580.580.57
Time- Interest-Earned
“A company with a high portion of long-term debt is said to be highly leveraged” (Anthony el al., 2011, p. 232).
The debt ratio indicates the percentage of assets financed with debt. The higher the debt ratio, the higher the financial risk. A debt ratio of less than one, indicates that a company has more assets than debt in form of liabilities. Dawson Stores, Inc. has debt ratio less than one.
Short-Term, Liquidity Ratios
2007200820092010
Current Ratio2.122.021.741.67
Quick Ratio1.121.131.021.00
Liquidity demonstrate the company’s ability to pay its obligations and current liabilities with current assets. Quick ratio demonstrate the ability to pay all current liabilities if they come due immediately. its is desirable for current assets to exceed current liabilities, “ a current ratio of at least 2 to 1 is believed to be desirable” (Anthony el al., 2011, p. 42).
A quick ratio of 1.5 indicates that the company has $1.5 of liquid assets for every $1 of current liabilities. Dawson Stores, Inc. has maintain a current ratio higher than 2 for previous years. Even though the this ratio dropped over the most recent years, as well as the quick ratio, the company can still meet it’s current liabilities.
Inventory Analysis
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The Current ratio and the Acid-test ratio, both fall under the category of financial ratios. These two ratios examine the capability of an organization to pay those creditors, whose debts are below the stipulated period of twelve months. Such short-term debts usually consist of 30 or 60 days credit period. Indeed under the two ratios the Current Liabilities are considered as the debt to be ...
2007200820092010
Inventory Turnover4.935.575.835.59
Accounts Receivable Turnover 6.39 6.66 6.88 6.75
Days’ Sales in Receivables 57.154.92 53.03 54.05
“Inventory turnover indicates the velocity with which merchandize moves through a business” (Anthony el al., 2011, p. 160).
It also indicates saleability of inventory. A low turnover implies poor sales and, therefore, excess inventory. Days’ sales in receivables shows how many days’ sales remain in account receivable. “The LIFO method results in lower reported inventory value on the balance sheet and higher cost of goods sold” (Anthony el al., 2011, p. 160).
Dawson Stores, Inc. enjoys a high inventory turnover.
Investment Utilization
2007200820092010
Asset Turnover1.681.751.751.75
Equity Turnover4.134.224.264.14
Dividend Payout32.637.821.721.8
The asset turnover ratio is an indicator of the efficiency with which a company is deploying its assets. The payout ratio provides an idea of how well earnings support the dividend payments. A reduction in dividends paid is looked poorly upon by investors. Dawson Stores, Inc. enjoy high investment utilization ratios as well as dividend payout.
Conclusion
It is recommended that the bank approves the credit line that Dawson Stores, Inc. as the company knows how to utilize its assets to maximize profit., and has shown improving profitability through increase in sales through the years analyzed . The long-standing and relationship of the Dawson Stores Inc. and the Springfield National Bank is another factor supporting this recommendation.
The profitability of Dawson Stores, Inc. can be established through the ratios calculated. Both the rate of return on assets and profit margin for rate of return on assets percentages have been rising. Total asset turnover of the firm also increased, indicating that the firm has been making most of its assets. Moreover, the operating expense to sales ratio decreased leading to an increasing profit margin. All these ratios illustrate a trend of increasing profitability through the years.
The short-term and liquidity ratios for Dawson Stores, Inc. decreased over recent years, However the company continues to meets its current liabilities. Another factor is the decreasing long-term liquidity ratios which shows that the company can meet the principal payments and interest expenses in the long run. This reflects a long-term stability of Dawson Stores, Inc.
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It is best to use average accounts receivable to avoid seasonality effects. If the company uses discounts, those discounts must be taken into consideration when calculate net accounts receivable. Accounts receivable represents the indirect interest free loans that the company is providing to its clients. Therefore, it is very important to know how "costly" these loans are for the company. A high ...
