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Financial Case Study on the Quality Furniture Company

The Quality Furniture Company was a high-quality home furniture manufacturer. Its headquarters was in Scranton and distribution depends on the department stores, independent home furnishing retailers and regional chains. The Lloyd's, Inc and the Emporium department store were two of them. The Lloyd's, Inc had been a customer of Quality Furniture for over 30 years. It always kept the good relationship and credit with Quality Furniture Company. The Lloyd's Inc sold quality home furnishings from three locations and its sales had the seasonal feature, with a slight downturn in the midsummer months and slight upturn during the December holiday season. Its income came from 75% cash or credit card and 25% six-month instalment terms. The Emporium was a new customer of Quality Furniture's. It was a medium-sized department store, which was well-known for its extensive lines of home furnishings. The Emporium built the partner relationship with Quality Furniture Company in 1983. It also had a good credit to Quality Furniture Company. Quality Furniture Company gave them the same accounts that were on terms of 2%, 10, net 30. Since the beginning of 2001, the competition in the furniture market had intensified, especially in the aspect of quality of product and service. The situation continued in for three years and looked like worse. So Quality Furniture Company thought credit terms and financing of dealers became equally important and was "backed into the position of supporting numerous customers in order to maintain adequate distribution for its products." On the other hand, Quality Furniture Company reinforced its supervision to the financial status of customers. Ralphson had previously a $50,000 limit on the Lloyd's Inc and an $85,000 limit on the Emporium. He adhered strictly to obtaining current reports of the retails quarterly and at times monthly in order to keep a good credit situation. With relaxing demand and decreasing the sale volume, the Lloyd's Inc and the Emporium faced more and more difficult phases. The following is an analysis to the current finial positions of these two companies. Analysis 1. The Lloyd's Inc. Performance measure The Lloyd's Inc showed negative in the return on investment. According the exhibit 1, the Lloyd's Inc even had no return on its total assets during the last two years. And to the return on invested capital and return on owners' equity, the situations were the same. It meant the Lloyd's Inc had not eared on the investment of all the financial resources and the funds invested by the shareholders. The reason was mainly the decreasing of net sale. In 2000 and 2001 the Lloyd's Inc sale was so bad that its net profit was below zero. The result was company lost much more capital. A point need be mentioned that we can get it used the loan to pay the dividends from the balance sheet of the Lloyd's Inc. If the loan was paid to their current liability, its performance would be looked well. Profitability The Lloyd's Inc profit margin equalled 3.8% in 2000, -0.12% in 2001 and -0.42% in 2002. And the gross margin showed the price was kept in a stable level in the three years. Thus, we can know the reason of the deceasing of sales is dollar sales volume has declined rather than the price-cutting. At the same time, we can get the Lloyd's Inc had a negative increase since 2000. Investment utilization We can analyze the investment utilization through investment turnover, inventory turnover and current ratio. From the investment turnover, which includes in asset turnover, invested capital turnover and equity turnover, the tendency was showed to sequent decreasing during the three years. They meant the Lloyd's Inc needed to enhance its profit margin to achieve a higher ROI. The inventory turnover has an evident decrease. Because inventory turnover indicates the velocity with which merchandise moves through a business, it said the sale had some problems as well. The current ratio, from 2.28 to 2.7, indicated the

potential problem in the Lloyd's Inc. I think the current ratios, 2.4 in 1999 and 2.28 in 2000, belong a normal level. But 2.7 in 2001, it meant some funds can not be utilized efficiently. Because of the own feather of the furniture industry, a lower current ratio must be more safe. Financial condition Financial condition ratios indicate the company's liquidity and solvency. From the financial leverage ratio and debt ratio, we can get the Lloyd's Inc had the high debt and definitely in the dangerous. And the solvency the Lloyd's Inc took did not make the company better. Although the situation was so bad, the company would not get into bankruptcy at least in a short term. 2. The Emporium Department Store Performance The Emporium performance is obviously better than the Lloyd's Inc. In fact, its ROI always kept the positive level during the three years. Although it lost the capital in the last two years, the company was profitable all the while. The Emporium profits had decreased severely since 2000. The reason is the same as the Lloyd's Inc; sale decreasing was the main problem. Profitability The gross margin shows the Emporium applied the discount strategy to try to improve the sale volume. But it did not manifestly achieve the goal. The lower price did not improve the sale volume on the contrary make profit lower. From the Emporium income statement, we can get elimination- reserves for inventory losses and reduction - bad debt reserve occurred only in 2002. It also indicated its price-cutting strategy failed. Investment utilization The Emporium investment turnover is the similar as the Lloyd's Inc. So like the Lloyd's Inc, it is in the normal level and need enhance the profit margin to get the high ROI. Inventory ratio is kept to a good condition during the three years. And current ratio was in the low level, from 1.38 to 1.46. It was in risk when the current ratio is too low in a long term. It means the Emporium hard met the maturing obligation and had the strong requirement for the safety margin. Finial condition According the exhibit 1, the Emporium finial condition was in the comparatively reasonable and safe level. The debt ratio is a matter of great importance in analyzing the soundness of the company's financial position. The lower debt is much less risky to the company. Solution As explained above, the Lloyd's Inc was in the dangers area, lower performance, lower profitability, lower investment utilization and higher debt ratio, a bad finial condition. But now press for collection, even if make its get into bankruptcy it is not wise. Its bad finial condition was partly from the softness of the furniture market. As a company had over 30 years sales experience and good credit, it still had a chance to get better. But Quality Furniture Company should take action to control the condition become worse. So Quality Furniture Company need take rigorous steps to collect, but stop short of legal action. On the other hand, it could reinforce to investigate the Lloyd's Inc debit ratio and return on investment in order to get the information in time and take relative action. Contrasting the Lloyds' Inc, the Emporium had much better condition. But it does not mean the Emporium have not any risk. In fact the Emporium had the same risk, only it did not completely appear. Although the Emporium still had profit, the profit was in the very low level. And from the case statement, we can know the situation would become more difficult on the Jan. Feb. and March, 2002. So Quality Furniture Company need pay more attention to the inventory turnover and current ratio. To the different company, Quality Furniture Company should apply the different solution. In the result, it is better solution to hold to the limit established, but do not press for collection.