Premier Furniture

Topics: Financial ratios, Financial ratio, Profit Pages: 1 (295 words) Published: October 15, 2008
There are several external and internal factors that contributed to the changes in overall financial health for Wolcott Department Stores and Designers, Inc, two credit risks to Premier Furniture. Both companies’ credit situations suffered from a downward turn in the market and a national rise in interest rates. To combat this, they were forced to reduce prices, lowering their profits margins. This action temporarily led to a decrease in demand as orders for shipments fell at least 10%. Wolcott’s ratios are most likely affected by their new store openings.

For Designers, Inc., there was in increase in their liquidity, shown by the current and quick ratios of Exhibit 1, but this was one of the only positive changes to their company’s financial situation. Large increases in the Days Inventory Held, the Average Collection Period, and the Days Payable Outstanding ratios imply great credit risks. This represents inefficiency in their abilities to move assets and collect payments. The negative ratios for Net Profit Margin, Return on Equity, and Return on Assets signify negative profitability and losses.

Adversely, Walcott saw only small increases in their Average Collection Period and Days Payable Outstanding ratios and actually decreased the number of days inventory is held, as seen in Exhibit 2. Similarly, Walcott saw decreases to their profitability but managed to keep their numbers positive for ROA, ROE, and Total Asset Turnover. Recommendations

My calculations suggest that Designers, Inc. is a much riskier investment. Premier should consider tightening their credit limits or dropping the company all together. As for Walcott, I would suggest that Premier reevaluate the ratios each quarter to monitor the effects of the new stores. Also, Premier needs to better communicate and align the goals of their credit manager and sales manager.
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