Dawson Stores, Inc. (Dawson) needs additional working capital next year. The company would like to obtain a $1,000,000 line of credit, on an unsecured basis from Springfield National Bank (Springfield).
The approval of an unsecured loan would be based on the borrower’s credit-worthiness. In order to evaluate this, the company provided its financial statements to Springfield for the year 1990 to 1993.
Dawson Stores Inc. is a company which has been experiencing consistent growth in terms of its financial performance. The relevant ratios are as seen in Exhibit A. Its financial ratios show that its return on assets and return on equity are both increasing. This shows that Dawson has been continuously using its assets and equity more efficiently. Furthermore, the decreasing debt ratio and debt-equity ratio imply that the company is relying more on equity (mostly from retained earning) rather than on long-term debts as source of financing.
A possible area of concern, especially for creditors, would be the decreasing current ratio of the company. This shows that Dawson is becoming less liquid through the years. Although this can be viewed negatively, careful examination of this ratio may provide some light on the strategy being employed by the company. Exhibit B shows major areas of Dawson’s cash outflow. As can be observed, Dawson is both decreasing its long-term debts and investing in property, plant and equipment. Without additional paid-in capital and / or increase in long-term debt, it is most likely that these cash outflow resulted to the decrease in liquidity since current assets were used to finance these two major sources of cash outflow. Thus, the decrease of current ratio is a reflection of the company paying its long-term debts and increasing its investments.
The Term Paper on Ford Motor Company Ratio Turnover Equity
Ford Motor Company GROUP PROJECT ACC 505 - FINANCIAL ACCOUNTING 12/01/96 TABLE OF CONTENTS DESCRIPTION PAGE INTRODUCTION... 1 LIQUIDITY... 1-3 Working Capital... 1 Current Ratio & Quick Ratio... 2 Receivable Turnover & Average Days's ales Uncollected... 2-3 Inventory Turnover & Average Days' Inventory on Hand... 3 PROFITABILITY... 3-7 Profit Margin... 3-4 Asset Turnover... 4-5 Return ...
These observations have two important implications. First, due to the company’s investments and proven ability to fully-utilize its assets (as evidenced by the increasing ROA), there is a reason to expect the company to maintain its growth. Second, the decrease in long-term liabilities may also imply that the company is able to manage its debts very well.
Accounts receivables have consistently been around 15% of sales throughout the four (4) years while bad debts have been around 3% of total accounts receivable. These figures show that although Dawson could improve on its bad debts, these aspects of the company are not really major sources of concerns since bad debts are usually inevitable and part of sales will really be made on credit. The figures seem to be consistent and not out-of-the ordinary, thus having minimal effect on the company’s credit-worthiness.
Therefore, it is the group’s conclusion that given the choice of either granting an unsecured line of credit or not, Springfield bank should choose the former on the following basis: 1) the company knows how to effectively make use of its assets and investments; 2) it pays its debts quite well; 3) the company has been established since 1881, thus proving its stability; 4) it has maintained its account with Springfield for many years; and 5) the owners of the company are also its top officers which could imply that they would look out for the best interest of the company.
The Essay on Debt And Credit
1. If you use your car as _collateral___ (property used to secure a loan), and you do not pay the loan back, the creditor has the right to repossess your car. 2. When a bank extends you _credit___, it allows you to borrow money and pay it back later with interest. 3. The _truth in lending laws___ require lenders to disclose the monthly interest rates and the method they use to calculate finance ...
Still, if given the choice, the group considers that having collateral along with the line of credit remains the best option since it would minimize the risk of the transaction. Springfield may even consider accepting Dawson’s accounts receivable as collateral especially if the company does not want to make use of its other tangible assets for this specific purpose.
