Page 1
Chapter 4: Measuring Corporate Performance
Case Study: Corporate Lending Group: The Hobby Horse
Company, Inc. (HH)
Burchetts Green had enjoyed the bank training course, but it was good to
be starting his first real job in the corporate lending group. Earlier that
morning the boss had handed him a set of financial statements for The
Hobby Horse Company, Inc. (HH). "Hobby Horse," she said, "has a $45
million loan from us due at the end of September, and it is likely to ask us
to roll it over. The company seems to have run into some rough weather
recently, and I have asked Furze Platt to go down there this afternoon and
see what is happening. It might do you good to go along with her. Before
you go, take a look at these financial statements and see what you think
the problems are. Here's a chance for you to use some of that stuff they
taught you in the training course."
Mr. Green was familiar with the HH story. Founded in 1990, it had rapidly
built up a chain of discount stores selling materials for crafts and hobbies.
However, last year a number of new store openings coinciding with a poor
Christmas season had pushed the company into loss. Management had
halted all new construction and put 15 of its existing stores up for sale.
Mr. Green decided to start with the 6-year summary of HH's balance sheet
and income statement (Table 4-1). Then he turned to examine in more
detail the latest position (Tables 4-2 and 4-3).
Source: Brealey, R.A.; Myers, S.C.; Marcus, A.J. (2009): Fundamentals of
Corporate Finance, 6th ed., New York: McGraw Hill, p. 107.
Questions:
What appear to be the problem areas in HH? Do the financial ratios
suggest questions that Ms. Platt and Mr. Green need to address?
1. Calculate financial ratios to interpret HHâs profitability, efficiency,
leverage, and liquidity. Use flow measures for the calculation of the
profitability and efficiency ratios (averages of the year).
2. For the preparation of the meeting with the bank, calculate also the
development of the leverage and liquidity ratios over the past years.
3. Interpret the calculated ratios and give suggestions for the management
how to proceed or how to (possibly) solve the problems.
Fachbereich Elektrische
Energietechnik
Prof. Dr. Valerie Wulfhorst
Betriebswirtschaftslehre,
insb. Controlling
Telefon
02921 378-451
Telefax
02921 378-409
E-Mail
[email protected]
Standort Soest
Lübecker Ring 2
59494 Soest
Fachhochschule
Südwestfalen
Sitz: Iserlohn
Hagen
Iserlohn
Meschede
Soest
www.fh-swf.de
Page 2
Tables:
Table 4- 1: Finance highlights for The Hobby Horse Company, Inc., year
ending March 31
Table 4- 2:
2008 2007 2006 2005 2004 2003
Net sales 3,351 3,314 2,845 2,796 2,493 2,160
EBIT -9 312 256 243 212 156
Interest 37 63 65 58 48 46
Taxes 3 60 46 43 39 34
Net profit -49 189 145 142 125 76
Earning per share -0.15 0.55 0.44 0.42 0.37 0.25
Current assets 669 469 491 435 392 423
Net fixed assets 923 780 753 680 610 536
Total assets 1,592 1,249 1,244 1,115 1,002 595
Current liabilities 680 365 348 302 276 320
Long-term debt 236 159 297 311 319 315
Stockholderâs equity 676 725 599 502 407 324
Number of stores 240 221 211 184 170 157
Employees 13,057 11,835 9,810 9,790 9,075 7,825
INCOME STATEMENT FOR
THE HOBBY HORSE COMPANY, INC.,
FOR YEAR ENDING MARCH 31, 2008
(all items in millions of dollars)
Net sales 3,351
Cost of goods sold 1,990
Selling, general, and administrative expenses 1,211
Depreciation expense 159
Earnings before interest and taxes (EBIT) -9
Net interest expense 37
Taxable income -46
Income taxes 3
Net income -49
Allocation of net income
Addition to retained earnings -49
Dividends 0
Page 3
Table 4- 3:
CONSOLIDATED BALANCE SHEET FOR THE HOBBY HORSE COMPANY, INC.
(figures in millions of dollars)
Assets Mar. 31, 2008 Mar. 31, 2007
Current assets
Cash and marketable securities 14 72
Receivables 176 194
Inventories 479 203
Total current assets 669 469
Fixed assets
Property, plant, and equipment (net of depreciation) 1,077 910
Less accumulated depreciation 154 130
Net fixed assets 923 780
Total assets 1,592 1,249
Liabilities and Shareholders' Equity Mar. 31, 2008 Mar. 31, 2007
Current liabilities
Debt due for repayment 484 222
Accounts payable 94 58
Other current liabilities 102 85
Total current liabilities 680 365
Long-term debt 236 159
Stockholders' equity
Common stock and other paid-in capital 155 155
Retained earnings 521 570
Total stockholders' equity 676 725
Total liabilities and stockholders' equity 1,592 1,249
Page 1
Chapter 4: Measuring Corporate Performance
Case Study: Corporate Lending Group: The Hobby Horse
Company, Inc. (HH)
Burchetts Green had enjoyed the bank training course, but it was good to
be starting his first real job in the corporate lending group. Earlier that
morning the boss had handed him a set of financial statements for The
Hobby Horse Company, Inc. (HH). "Hobby Horse," she said, "has a $45
million loan from us due at the end of September, and it is likely to ask us
to roll it over. The company seems to have run into some rough weather
recently, and I have asked Furze Platt to go down there this afternoon and
see what is happening. It might do you good to go along with her. Before
you go, take a look at these financial statements and see what you think
the problems are. Here's a chance for you to use some of that stuff they
taught you in the training course."
Mr. Green was familiar with the HH story. Founded in 1990, it had rapidly
built up a chain of discount stores selling materials for crafts and hobbies.
However, last year a number of new store openings coinciding with a poor
Christmas season had pushed the company into loss. Management had
halted all new construction and put 15 of its existing stores up for sale.
Mr. Green decided to start with the 6-year summary of HH's balance sheet
and income statement (Table 4-1). Then he turned to examine in more
detail the latest position (Tables 4-2 and 4-3).
Source: Brealey, R.A.; Myers, S.C.; Marcus, A.J. (2009): Fundamentals of
Corporate Finance, 6th ed., New York: McGraw Hill, p. 107.
Questions:
What appear to be the problem areas in HH? Do the financial ratios
suggest questions that Ms. Platt and Mr. Green need to address?
1. Calculate financial ratios to interpret HHâs profitability, efficiency,
leverage, and liquidity. Use flow measures for the calculation of the
profitability and efficiency ratios (averages of the year).
2. For the preparation of the meeting with the bank, calculate also the
development of the leverage and liquidity ratios over the past years.
3. Interpret the calculated ratios and give suggestions for the management
how to proceed or how to (possibly) solve the problems.
Fachbereich Elektrische
Energietechnik
Prof. Dr. Valerie Wulfhorst
Betriebswirtschaftslehre,
insb. Controlling
Telefon
02921 378-451
Telefax
02921 378-409
E-Mail
[email protected]
Standort Soest
Lübecker Ring 2
59494 Soest
Fachhochschule
Südwestfalen
Sitz: Iserlohn
Hagen
Iserlohn
Meschede
Soest
www.fh-swf.de
Page 2
Tables:
Table 4- 1: Finance highlights for The Hobby Horse Company, Inc., year
ending March 31
Table 4- 2:
2008 2007 2006 2005 2004 2003
Net sales 3,351 3,314 2,845 2,796 2,493 2,160
EBIT -9 312 256 243 212 156
Interest 37 63 65 58 48 46
Taxes 3 60 46 43 39 34
Net profit -49 189 145 142 125 76
Earning per share -0.15 0.55 0.44 0.42 0.37 0.25
Current assets 669 469 491 435 392 423
Net fixed assets 923 780 753 680 610 536
Total assets 1,592 1,249 1,244 1,115 1,002 595
Current liabilities 680 365 348 302 276 320
Long-term debt 236 159 297 311 319 315
Stockholderâs equity 676 725 599 502 407 324
Number of stores 240 221 211 184 170 157
Employees 13,057 11,835 9,810 9,790 9,075 7,825
INCOME STATEMENT FOR
THE HOBBY HORSE COMPANY, INC.,
FOR YEAR ENDING MARCH 31, 2008
(all items in millions of dollars)
Net sales 3,351
Cost of goods sold 1,990
Selling, general, and administrative expenses 1,211
Depreciation expense 159
Earnings before interest and taxes (EBIT) -9
Net interest expense 37
Taxable income -46
Income taxes 3
Net income -49
Allocation of net income
Addition to retained earnings -49
Dividends 0
Page 3
Table 4- 3:
CONSOLIDATED BALANCE SHEET FOR THE HOBBY HORSE COMPANY, INC.
(figures in millions of dollars)
Assets Mar. 31, 2008 Mar. 31, 2007
Current assets
Cash and marketable securities 14 72
Receivables 176 194
Inventories 479 203
Total current assets 669 469
Fixed assets
Property, plant, and equipment (net of depreciation) 1,077 910
Less accumulated depreciation 154 130
Net fixed assets 923 780
Total assets 1,592 1,249
Liabilities and Shareholders' Equity Mar. 31, 2008 Mar. 31, 2007
Current liabilities
Debt due for repayment 484 222
Accounts payable 94 58
Other current liabilities 102 85
Total current liabilities 680 365
Long-term debt 236 159
Stockholders' equity
Common stock and other paid-in capital 155 155
Retained earnings 521 570
Total stockholders' equity 676 725
Total liabilities and stockholders' equity 1,592 1,249
