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 4.10). Then he turned to examine in more detail the latest position (Tables 4.11 and 4.12).
What appear to be the problem areas in HH? Do the financial ratios suggest questions that Ms. Platt and Mr. Green need to address?
Table 4.10

Table 4.11

Table 4.12

Transcribed Image Text:

2014 2013 2012 2011 2010 2009 Net sales 2,160 2,845 2,796 2,493 3.351 3.314 EBIT 256 156 243 212 312 Interest 58 63 65 48 46 37 Taxes (24% tax rate) 46 60 3 43 39 34 Net income 189 -49 76 145 142 125 Earnings per share -15 .42 -55 .44 37 25 Current assets 669 469 491 392 435 423 Net fixed assets 780 680 610 536 923 753 Total assets 1,592 1,249 1,244 5וגו 1,002 959 Current liabilities 680 365 348 276 302 320 Long-term debt 236 159 297 311 319 315 Stockholders' equity 676 725 502 599 407 324 Number of stores 184 240 221 211 170 157 Employees 11,835 9,810 7,825 13,057 9,790 9,075 Net sales 3.351 Cost of goods sold 1,990 Selling, general, and administrative expenses 1,21 Depreciation expense 159 Earnings before interest and taxes (EBIT) -9 Net interest expense 37 Taxable income -46 Income taxes Net income -49 Allocation of net income: Addition to retained earnings -49 Dividends