Premier Case

Premier Furniture Case

The Premier Furniture Company of Newfield, North Carolina, centers on manufacturing high-quality home furniture for distribution. By 1975, Premier found that product quality and service no longer assured success in the markets they were in; therefore, credit terms and financing of dealers became a critical marketing tool. Regrettably, Premier’s weighty financing of dealers corresponded with a national credit squeeze and higher interest rates on borrowed money. In 1984, Richard Zimmerman, the credit analyst for the Premier Furniture Company, took over the task of assessing the financial health of Premier’s customers. Two of their accounts, Designers Inc. of Pittsburgh, PA, and Walcott Department Stores of Hartford, CT, had exceeded the credit limits previously set by Premier. Premier had to make a decision on Designers Inc. and WalcottвЂ"they needed to figure out the difference between good customers and bad credit risk.

There are several commonly used ratios to capture various aspects of credit risk: profitability and operating performance ratios, total indebtedness (leverage ratios), and liquidity ratios, especially short-term liquidity. Earnings are a good predictor of future cash flows and it suggests all other things equal, that firms with strong earnings performance are less likely to default on their debt obligations. Designers’ gross margin stayed fairly steady, only dropping 1.43%; Walcott’s gross margin dropped 5.86%. The operating profit margin for each account dropped by 3.93% and 10.73% respectively, and the net profit margin for each account dropped 7.48% and 3.13% respectively. For our case, we really should pay attention to the net profit margin because it shows the impacts of not only cost of goods sold and administration, but also financingвЂ"financing is important when it comes to credit risk. Walcott’s net profit margin seems to be healthier than Designers’ because it is not decreasing as fast as Designers net profit margin.

Furthermore, leverage provides a measure of overall indebtedness of the firm. Leverage is often considered when evaluating credit quality, with high leverage firms having higher credit risk than those with relatively less debt. Comparing the two accounts, Walcott’s debt ratio of 0.4833 in 1983 and 0.4614 in 1984 is considerably better than Designers’ debt ratio of 0.8997 and 0.8888, respectively.