Hampton Machine
Essay title: Hampton Machine
STEPHANIE ANDERSON
FROM: JOHN KLEIN
DATE: 18 DECEMBER 1994
RE: CREDIT WORTHINESS OF DAWSON STORES
RECOMMENDATION
Upon analyzing the financial statements provided by Mr. John Dawson, Jr. From my analysis of the statements and data, it is my recommendation that Springfield National Bank provide an unsecured $1,000,000 line of credit to the applicant.
ANALYSIS
Dawson Stores Inc. is worthy of the line of credit due to the successes that they have had in the following areas:
Solvency
Management of Capital
Profitability of the Business
Increasing Positive Cash Flow
Long-Term Capitalization
Prior Business History
1. Solvency
Dawson Stores Inc. has proven to be quite solvent in their ability to meet their short-term debt obligations through quality management in the following areas.
Net Working Capital: As shown in exhibit 1, the net working capital has increased by 5.8 percent over the past four years. Although this number is small, it shows the company is able to consistently meet its short-term debt obligations. This increase also shows that the risk of the company defaulting on a payment is less likely to occur.
Current Ratio: The current ratio (exhibit 2) in the four-year span has been decreasing but it is still in the benchmark range for retailers, which is around 1.5-2. This means that the company has had sufficient cash resources to the bills that they need to pay.
Quick Ratio: From exhibit 3, it can be concluded that Dawson Stores Inc. is doing a good job at managing its cash. The company is around the benchmark of one which shows that its cash and consumers equity is around the same amount as its current liabilities.
2. Management of Capital
After looking through the financial statements, it was seen that Dawson Stores Inc. was doing well in overall management of the company. In the following areas, Dawson was either close to or performing above a standard benchmark ratio for the retail business.
Inventory Turnover: Exhibit four shows that its inventory turnover increased from 1990 to 1993. Though retail is based upon four seasons of sale and Dawson’s inventory turnover is larger than that, it is not large enough to cause worry. The Last two years show that this ratio was declining back to the benchmark of around four.
Property Plant Equipment Turnover: The turnover figure went up over the four-year span (Exhibit 5). This is good because the company is using its P.P.E. effectively to generate sales.
3. Profitability of the Business
Dawson Stores Inc. has had tremendous success in growth and profits in the four-year span analyzed. Through analysis of the financial statements it was calculated that the company’s pretax earnings have been increasing at a tremendous rate. In the four years, pretax earnings increased by 156 percent. An operation that contributed to this increase was:
Expense Management: The Company was able to cut back on its costs and expenses. Cost of goods decreased from 70 to 68.52 percent along with a drop in operating expenses from 26 to 24 percent.
Other Positive signs of increased profitability came from following calculations:
Gross Profit Ratio: The results of this ratio (Exhibit 6), show that Dawson is performing quite well in the amount it is getting back for each dollar spent to its expenses.