Allied Apparel Company received a large order from Websters Department Stores,
which operates a chain of approximately 300 popular-priced department stores located primarily in the New England-Middle Atlantic states. Allied is considering extending trade credit to Websters. As part of its credit check, Allied obtained Web- sters' balance sheets and income statements for the last three years. A check of sev- eral of Websters' trade creditors has revealed that the firm generally takes any cash discounts when they are offered but averages about 30 days overdue on its payments to two suppliers whose credit terms are "net 30."
A Dun & Bradstreet publication entitled Key Business Ratios yielded the following information concerning the "average" financial ratios for firms in the same line of business as Websters:
|
Current assets to current liabilities
|
2.82
|
|
Earnings after taxes to sales
|
1.89%
|
|
Earnings after taxes to stockholders' equity
|
5.65%
|
|
Total liabilities to stockholders' equity
|
1.48
|
Websters Department Stores Balance Sheet (in Thousands of Dollars)
Assets 2008 2009 2010
Current assets:
Cash and marketable securities $ 9,283 $ 13,785 $ 23,893
Accounts receivable (net) 162,825 179,640 140,543
Inventories 119,860 135,191 120,707
Other 1,994 2,190 1,956
Total current assets $293,962 $ 330,806 $296,099
Long-term assets:
Building and equipment (net) $ 27,426 $ 30,295 $ 30,580
Other 11,821 14,794 16,687
Total long-term assets $ 39,247 $ 45,089 $ 47,267
Total assets $333,209 $ 375,895 $343,366
Liabilities and stockholders' equity
Current liabilities:
Accounts payable $ 23,637 $ 21,861 $ 15,020
Notes payable 117,010 135,929 165,299
Other 49,273 49,229 29,653
Total current liabilities $189,920 $ 207,019 $209,972
Long-term liabilities:
Debentures $ 38,001 $ 36,101 $ 35,201
Term loan - 28,440 29,701
Other 4,986 853 655
Total long-term liabilities $ 42,987 $ 65,394 $ 65,557
Stockholders' equity:
|
Common stock
|
$ 5,576
|
$ 5,576
|
$ 5,576
|
|
Preferred stock
|
2,580
|
2,580
|
2,580
|
|
Retained earnings
|
92,146
|
95,326
|
59,681
|
|
Total stockholders' equity
|
$100,302
|
$103,482
|
$ 67,837
|
|
Total liabilities and stockholders' equity
|
$333,209
|
$375,895
|
$343,366
|
Websters Department Stores Income Statement (in Thousands of Dollars)
|
2008
|
2009
|
2010
|
|
Sales
|
$494,550
|
$556,132
|
$529,857
|
|
Cost of sales
|
337,580
|
384,899
|
390,980
|
|
Gross profit
|
$156,970
|
$171,233
|
$138,877
|
|
Selling, general, and administrative expenses
|
133,330
|
155,494
|
187,926
|
|
Earnings before taxes
|
$ 23,640
|
$ 15,739
|
$-49,049
|
|
Income taxes
|
7,715
|
6,222
|
-14,741
|
|
Earnings after taxes
|
$ 15,925
|
$ 9,517
|
$-34,308
|
|
Dividends
|
6,343
|
6,337
|
1,337
|
|
Additions to retained earnings
|
$ 9,582
|
$ 3,180
|
$-35,645
|
In evaluating Websters' application for trade credit, answer the following questions:
a. What positive financial factors would lead Allied to decide to extend credit to Websters?
b. What negative financial factors would lead Allied to decide not to extend credit to Websters?
c. What additional information about Websters would be useful in performing the analysis?