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.
1. The Lloyd's Inc.
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.
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.
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...
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