Dawson Stores. Inc. ( Dawson ) needs extra working capital following twelvemonth. The company would wish to obtain a $ 1. 000. 000 line of recognition. on an unbarred footing from Springfield National Bank ( Springfield ) . The blessing of an unbarred loan would be based on the borrower’s credit-worthiness. In order to measure this. the company provided its fiscal statements to Springfield for the twelvemonth 1990 to 1993.
Dawson Stores Inc. is a company which has been sing consistent growing in footings of its fiscal public presentation. The relevant ratios are as seen in Exhibit A. Its fiscal ratios show that its return on assets and return on equity are both increasing. This shows that Dawson has been continuously utilizing its assets and equity more expeditiously. Furthermore. the diminishing debt ratio and debt-equity ratio imply that the company is trusting more on equity ( largely from retained gaining ) instead than on long-run debts as beginning of funding.
A possible country of concern. particularly for creditors. would be the diminishing current ratio of the company. This shows that Dawson is going less liquid through the old ages. Although this can be viewed negatively. careful scrutiny of this ratio may supply some visible radiation on the scheme being employed by the company. Exhibit Bacillus shows major countries of Dawson’s hard currency escape. As can be observed. Dawson is both diminishing its long-run debts and puting in belongings. works and equipment. Without extra paid-in capital and / or increase in long-run debt. it is most likely that these hard currency escape resulted to the lessening in liquidness since current assets were used to finance these two major beginnings of hard currency escape. Therefore. the lessening of current ratio is a contemplation of the company paying its long-run debts and increasing its investings.
These observations have two of import deductions. First. due to the company’s investings and proved ability to fully-utilize its assets ( as evidenced by the increasing ROA ) . there is a ground to anticipate the company to keep its growing. Second. the lessening in long-run liabilities may besides connote that the company is able to pull off its debts really good.
Histories receivables have systematically been about 15 % of gross revenues throughout the four ( 4 ) old ages while bad debts have been around 3 % of entire histories receivable. These figures show that although Dawson could better on its bad debts. these facets of the company are non truly major beginnings of concerns since bad debts are normally inevitable and portion of gross revenues will truly be made on recognition. The figures seem to be consistent and non out-of-the ordinary. therefore holding minimum consequence on the company’s credit-worthiness.
Therefore. it is the group’s decision that given the pick of either allowing an unbarred line of recognition or non. Springfield bank should take the former on the undermentioned footing: 1 ) the company knows how to efficaciously do usage of its assets and investings ; 2 ) it pays its debts rather good ; 3 ) the company has been established since 1881. therefore turn outing its stableness ; 4 ) it has maintained its history with Springfield for many old ages ; and 5 ) the proprietors of the company are besides its top officers which could connote that they would look out for the best involvement of the company.
Still. if given the pick. the group considers that holding collateral along with the line of recognition remains the best option since it would minimise the hazard of the dealing. Springfield may even see accepting Dawson’s histories receivable as collateral particularly if the company does non desire to do usage of its other touchable assets for this specific intent.