Burchetts Green had enjoyed the bank training course, but it was
Question # 00272570
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Updated on: 05/04/2016 02:09 PM Due on: 06/03/2016
Burchetts Green had enjoyed the bank training course, but it was
good to be starting his first real job in the corporate lending group.
Earlier that morning the boss had handed him a set of financial
statements for The Hobby Horse Company, Inc. (HH). "Hobby
Horse,: she said, "has a $45 million loan from us due at the end of
September, and it is likely to ask us to roll it over. The company
seems to have run into some rough weather recently, and I have
asked Furze Platt to go down there this afternoon and see what is
happening. It might do you good to go along with her. Before you
go, take a look at these financial statements and see what you think
the problems are. Here's a chance for you to use some of that stuff
they taught you in the training course.:
Mr. Green was familiar with the HH story. Founded in 1990,
it had rapidly built up a chain of discount stores selling materials
for crafts and hobbies. However, last year a number of new store
openings coinciding with a poor Christmas season had pushed the
company into loss. Management had halted all new construction
and put 15 of its existing stores up for sale.
Mr. Green decided to start with the 6-year summary of HH's
balance sheet and income statement (Table 4'11). Then he turned to
examine in more detail the latest position (Tables 4'12 and 4'13).
What appear to be the problem areas in HH? Do the financial
ratios suggest questions that Ms. Platt and Mr. Green need to
address?
108 Part One Introduction
www.mhhe.com/bmm6e
2008 2007 2006 2005 2004 2003
Net sales 3,351 3,314 2,845 2,796 2,493 2,160
EBIT 9 312 256 243 212 156
Interest 37 63 65 58 48 46
Taxes 3 60 46 43 39 34
Net profit 49 189 145 142 125 76
Earnings per share 0.15 0.55 0.44 0.42 0.37 0.25
Current assets 669 469 491 435 392 423
Net fixed assets 923 780 753 680 610 536
Total assets 1,592 1,249 1,244 1,115 1,002 959
Current liabilities 680 365 348 302 276 320
Long-term debt 236 159 297 311 319 315
Stockholders' equity 676 725 599 502 407 324
Number of stores 240 221 211 184 170 157
Employees 13,057 11,835 9,810 9,790 9,075 7,825
TABLE 4'11 Financial
highlights for The Hobby Horse
Company, Inc., year ending
March 31
TABLE 4'12 INCOME STATEMENT FOR
THE HOBBY HORSE COMPANY, INC.,
FOR YEAR ENDING MARCH 31, 2008
(all items in millions of dollars)
Net sales 3,351
Cost of goods sold 1,990
Selling, general, and administrative expenses 1,211
Depreciation expense 159
Earnings before interest and taxes (EBIT) 9
Net interest expense 37
Taxable income 46
Income taxes 3
Net income 49
Allocation of net income
Addition to retained earnings 49
Dividends 0
Note: Column sums subject to rounding error
good to be starting his first real job in the corporate lending group.
Earlier that morning the boss had handed him a set of financial
statements for The Hobby Horse Company, Inc. (HH). "Hobby
Horse,: she said, "has a $45 million loan from us due at the end of
September, and it is likely to ask us to roll it over. The company
seems to have run into some rough weather recently, and I have
asked Furze Platt to go down there this afternoon and see what is
happening. It might do you good to go along with her. Before you
go, take a look at these financial statements and see what you think
the problems are. Here's a chance for you to use some of that stuff
they taught you in the training course.:
Mr. Green was familiar with the HH story. Founded in 1990,
it had rapidly built up a chain of discount stores selling materials
for crafts and hobbies. However, last year a number of new store
openings coinciding with a poor Christmas season had pushed the
company into loss. Management had halted all new construction
and put 15 of its existing stores up for sale.
Mr. Green decided to start with the 6-year summary of HH's
balance sheet and income statement (Table 4'11). Then he turned to
examine in more detail the latest position (Tables 4'12 and 4'13).
What appear to be the problem areas in HH? Do the financial
ratios suggest questions that Ms. Platt and Mr. Green need to
address?
108 Part One Introduction
www.mhhe.com/bmm6e
2008 2007 2006 2005 2004 2003
Net sales 3,351 3,314 2,845 2,796 2,493 2,160
EBIT 9 312 256 243 212 156
Interest 37 63 65 58 48 46
Taxes 3 60 46 43 39 34
Net profit 49 189 145 142 125 76
Earnings per share 0.15 0.55 0.44 0.42 0.37 0.25
Current assets 669 469 491 435 392 423
Net fixed assets 923 780 753 680 610 536
Total assets 1,592 1,249 1,244 1,115 1,002 959
Current liabilities 680 365 348 302 276 320
Long-term debt 236 159 297 311 319 315
Stockholders' equity 676 725 599 502 407 324
Number of stores 240 221 211 184 170 157
Employees 13,057 11,835 9,810 9,790 9,075 7,825
TABLE 4'11 Financial
highlights for The Hobby Horse
Company, Inc., year ending
March 31
TABLE 4'12 INCOME STATEMENT FOR
THE HOBBY HORSE COMPANY, INC.,
FOR YEAR ENDING MARCH 31, 2008
(all items in millions of dollars)
Net sales 3,351
Cost of goods sold 1,990
Selling, general, and administrative expenses 1,211
Depreciation expense 159
Earnings before interest and taxes (EBIT) 9
Net interest expense 37
Taxable income 46
Income taxes 3
Net income 49
Allocation of net income
Addition to retained earnings 49
Dividends 0
Note: Column sums subject to rounding error
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Rating:
/5
Solution: Burchetts Green had enjoyed the bank training course, but it was