Case Study on Return on Investment in The Quality Furniture Company

By Sheel Kumar Hans

The Case is About The Problems

A bad financial condition which is by lower

performance, lower profitability, lower investment utilization and higher debt ratio. Effects of improper utilization of investments. Effects of intensified competition in the market. Effects of too much lenient credit terms and financing. Effects of high debt and pressurising customers for collection of debts. Effects of reducing exports rather than the pricecutting. Whats the risk when the current ratio is too high or too low in a long term.

The Case is About The Solutions

To hold the limit established for credit. To utilize the funds efficiently. To collect debt follow rigorous steps, rather than sort

of legal action. The strategy that sometimes the lower price did not improve the sale volume on the contrary make profit lower. So the Marketing strategise should be effective to the customers but not affecting the financial conditions. To achieve a higher ROI company need to enhance its profit margin. Financial condition ratios indicate the company's liquidity and solvency.

Introduction About The Quality Furniture Company

The Quality Furniture Company was a high-quality

home furniture manufacturer.

Its headquarters was in Scranton, US 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.

About The Lloyd's Inc.

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.

About the Emporium department store

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.

Problem with Quality Furniture Company

Quality Furniture Company gave them the same

accounts. 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."

Problem with Quality Furniture Company

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.

SWOT Analysis of The Lloyd's Inc.

S
30 yrs. sales exp.

O
Strong position in market Favorable business conditions

T
Intensified competition in the market High debt can be high bad debts

Net profit was below zero Income Company mode 75% had the high cash & 25% in debt instalments 3 Locations Sale was so bad No return on total assets

SWOT Analysis of The Emporium Department Store

S
Financial condition was at a safe level ROI always kept the positive level Low debt

W
Lost the capital in the last two years Profits had decreased

O
Supporting debtors Favorable business conditions

T
Intensified competition in the market Not a strong position in market

Decrement in sale Company Not effective was profitable price strategy

Analysis of The Lloyd's Inc.

Performance measure
The Lloyd's Inc showed negative in the return on

investment. 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. The reason was mainly the decreasing of net sale.

Analysis of The Lloyd's Inc.

Cond...... 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.

Analysis of The Lloyd's Inc.

Profitability
The Lloyd's Inc profit margin equalled 3.8% in

2000, -0.12% in 2001 and -0.42% in 2002. 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 the Lloyd's Inc. had a negative increase since 2000.

Analysis of The Lloyd's Inc.

Investment utilization
The investment utilization through investment

turnover, inventory turnover and current ratio. The investment turnover, which includes in asset turnover, invested capital turnover and equity turnover, was 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. 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.

Current Ratio
Total Current Assets/Total Current Liabilities = x times Current Assets are assets that you can readily turn in to

cash or will do so within 12 months in the course of business. Current Liabilities are amount you are due to pay within the coming 12 months. For example, 1.5 times means that you should be able to lay your hands on $1.50 for every $1.00 you owe. Less than 1 times e.g. 0.75 means that you could have liquidity problems and be under pressure to generate sufficient cash to meet oncoming demands. Because of the own feather of the furniture industry, a lower current ratio must be more safe.

Analysis of The Lloyd's Inc.

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. 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.

Analysis of 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.

Analysis of The Emporium Department Store

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.

Analysis of The Emporium Department Store

Investment utilization
The investment turnover is the similar as 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. 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. The Store hard met the maturing obligation and had the strong requirement for the safety margin.

Analysis of The Emporium Department Store

Financial condition
The Emporium financial 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
The Lloyd's Inc was in the dangers area, lower

performance, lower profitability, lower investment utilization and higher debt ratio, a bad financial condition. But now press for collection, even if make its get into bankruptcy it is not wise. Its bad financial 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.

Solution
So Quality Furniture Company need take rigorous

steps to collect, but stop sort 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.

Solution
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.