Premier Furniture Case
Premier Furniture Case
The Premier Furniture Company of Newfield, North Carolina, centers on manufacturing high-quality home furniture for distribution. By 1975, Premier found that product quality and service no longer assured success in the markets they were in; therefore, credit terms and financing of dealers became a critical marketing tool. Regrettably, Premier’s weighty financing of dealers corresponded with a national credit squeeze and higher interest rates on borrowed money. In 1984, Richard Zimmerman, the credit analyst for the Premier Furniture Company, took over the task of assessing the financial health of Premier’s customers. Two of their accounts, Designers Inc. of Pittsburgh, PA, and Walcott Department Stores of Hartford, …show more content…
Earnings are a good predictor of future cash flows and it suggests all other things equal, that firms with strong earnings performance are less likely to default on their debt obligations. Designers’ gross margin stayed fairly steady, only dropping 1.43%; Walcott’s gross margin dropped 5.86%. The operating profit margin for each account dropped by 3.93% and 10.73% respectively, and the net profit margin for each account dropped 7.48% and 3.13% respectively. For our case, we really should pay attention to the net profit margin because it shows the impacts of not only cost of goods sold and administration, but also financing—financing is important when it comes to credit risk. Walcott’s net profit margin seems to be healthier than Designers’ because it is not decreasing as fast as Designers net profit …show more content…
Leverage is often considered when evaluating credit quality, with high leverage firms having higher credit risk than those with relatively less debt. Comparing the two accounts, Walcott’s debt ratio of 0.4833 in 1983 and 0.4614 in 1984 is considerably better than Designers’ debt ratio of 0.8997 and 0.8888, respectively. Moreover, after calculating the debt-to-equity ratios, Walcott’s ratios of 0.9355 in 1983 and 0.8565 in 1984 are superior to Designers’ debt-to-equity ratios which are 6.058 and 5.8417. These calculations display to use that Walcott seems to have less credit risk than Designers, thus being a safer option.
The current ratio captures the short-term liquidity of the firm and since debt payments are ultimately made from cash, the current ratio measures the extent to which current assets are available to make payments. Designers’ current ratios are as follows: 2.3964 in 1982, 2.2772 in 1983, and 2.7016 in 1984; whereas Walcott’s are: 1.3921 in 1983 and 1.4594 in 1984. Designers’ seems to be a more short-term liquid company which is an appealing factor when dealing with credit
The Premier Furniture Company of Newfield, North Carolina, centers on manufacturing high-quality home furniture for distribution. By 1975, Premier found that product quality and service no longer assured success in the markets they were in; therefore, credit terms and financing of dealers became a critical marketing tool. Regrettably, Premier’s weighty financing of dealers corresponded with a national credit squeeze and higher interest rates on borrowed money. In 1984, Richard Zimmerman, the credit analyst for the Premier Furniture Company, took over the task of assessing the financial health of Premier’s customers. Two of their accounts, Designers Inc. of Pittsburgh, PA, and Walcott Department Stores of Hartford, …show more content…
Earnings are a good predictor of future cash flows and it suggests all other things equal, that firms with strong earnings performance are less likely to default on their debt obligations. Designers’ gross margin stayed fairly steady, only dropping 1.43%; Walcott’s gross margin dropped 5.86%. The operating profit margin for each account dropped by 3.93% and 10.73% respectively, and the net profit margin for each account dropped 7.48% and 3.13% respectively. For our case, we really should pay attention to the net profit margin because it shows the impacts of not only cost of goods sold and administration, but also financing—financing is important when it comes to credit risk. Walcott’s net profit margin seems to be healthier than Designers’ because it is not decreasing as fast as Designers net profit …show more content…
Leverage is often considered when evaluating credit quality, with high leverage firms having higher credit risk than those with relatively less debt. Comparing the two accounts, Walcott’s debt ratio of 0.4833 in 1983 and 0.4614 in 1984 is considerably better than Designers’ debt ratio of 0.8997 and 0.8888, respectively. Moreover, after calculating the debt-to-equity ratios, Walcott’s ratios of 0.9355 in 1983 and 0.8565 in 1984 are superior to Designers’ debt-to-equity ratios which are 6.058 and 5.8417. These calculations display to use that Walcott seems to have less credit risk than Designers, thus being a safer option.
The current ratio captures the short-term liquidity of the firm and since debt payments are ultimately made from cash, the current ratio measures the extent to which current assets are available to make payments. Designers’ current ratios are as follows: 2.3964 in 1982, 2.2772 in 1983, and 2.7016 in 1984; whereas Walcott’s are: 1.3921 in 1983 and 1.4594 in 1984. Designers’ seems to be a more short-term liquid company which is an appealing factor when dealing with credit