FINANCIAL ANALYSIS OF DAWSON STORES, INC.

Dawson Stores Inc. represented by Mr. John Dawson Jr. wants to apply for a $1M credit line on an
unsecured basis for their short term needs. The credit line is requested to be available for one (1)
year on an unsecured basis. John Dawson provided the company's financial statements for the last four
years for the review of Springfield National Bank.

Financial analysis of this given case started with review of the basic financial statements of the
Dawson Stores, Inc., covering the period beginning January 1, 2000-2003, with focus on the
profitability and liquidity of the debtor.
1. THE FINANCIAL POSITION (BALANCE SHEET)
The balance sheet, also known as the statement of financial condition, offers a snapshot of a
company's health. It tells you how much a company owns (its assets), and how much it owes (its
liabilities). The difference between what it owns and what it owes is its equity, also commonly
called "net assets" or "shareholders equity".
Based on the horizontal analysis presented, net assets are continuously increasing. This implies an
improving financial position for the company over the 4 years.

2. THE FINANCIAL PERFORMANCE (INCOME STATEMENT)

The primary purpose of the income statement is to report a companys earnings over the period of
time.

Dawson was able to earn average profit evidenced by the companys increasing revenue (sales),
gross profit and for the last 4 years. This indicates that the companys operations are growing.

3. RATIO ANALYSIS
3.1. LIQUIDITY RATIOS AND WORKING CAPITAL
3.1.1 LIQUIDITY RATIOS

2000 2001 2002 2003

Current Ratio 2.12 2.02 1.74 1.67
Quick, or Acid Test, Ratio 1.12 1.13 1.02 1.00

To see if the company is able to pay off its debts as they come due over the next year or so, current
ratios are calculated. Current ratio is based on the data of the balance sheet. As shown in the data
above, Current ratios and Quick, or Acid Test ratio have been deteriorating from 2000 to 2003
respectively. Generally, a current ratio of 2.0 and quick ratio of 1.0 are considered indicative of
adequate liquidity. The quick ratio is 1.0 and can be considered as normal which means that the
company has $1.00 available in its $1.00 liability, the current ratio data, on the other hand,
decreased down to 1.67. Thus, it can be concluded that the company has somewhat weak liquidity.
3.1.2 WORKING CAPITAL

2000 % 2001 % 2002 % 2003

Working Capital 2,983 -0.05 2849 0.05 2,986 0.06 3,156
Deferred Payment acc. 2,606 0.04 2,709 0.15 3,102 0.16 3,595
Working capital is the difference of current assets and current liabilities. It can be described as the
sufficient cash to run the operations. As to working capital, the company has positive working
capital. However, deferred payment account has been increasing sharply up to 16 % of account
receivable. It indicates that the company has problems in collecting its receivable. It will possibly
be resulted that the company will be faced with liquidity problems. Clearly shown above, the
company needs more money to run the operations.

3.2. PROFITABILITY RATIOS

2000 2001 2002 2003

Profit Margin % 29.96% 29.01% 31.00% 31.50%
Return on Equity (ROE) % 8.02% 7.08% 12.94% 14.67%
Return on Assets (ROA) % 3.27% 2.00% 3.83% 4.40%
Profitability ratios show the combined effects of liquidity, asset management, and debt
management policies on operating result.
The return of assets (ROA) of a firm is significant to most financial statement readers because it
describes that the rate of return management was able to earn on the assets available to use during
the year. Since the ROA is increasing for the past two years, it means the company is utilizing its
funds better.
Additionally, return on equity (ROE) is also important to current stockholder and perspective
investors because it relates earnings to owners investment, that is, the owners equity in the assets
of entity. So ROEs of the company are equal to the average, and they have been increasing for the
last two years; respectively 12.94 % and 14.67 %. The reason of this is the debt financing pattern
of the company. Profit margin of the company has been also increasing for the last two years.
3.3. DEBT MANAGEMENT RATIOS

2000 2001 2002 2003

Debt Ratio % 59.17 58.41 58.93 57.69
Debt/Equity Ratio % 1.45 1.40 1.43 1.36
The debt ratios measure the percentage of funds provided by sources other than equity. High debt
ratio indicates a possible difficulty in paying interest and principal while obtaining more funds, the
debt ratios of the company are 59.17 % for 2000, 58.41 % for 2001, 58.93 % for 2002, and 57.69
% for 2003. The companys debt ratio is decreasing which implies that the companys reliance on
debt is decreasing. It also means that the companys creditors have supplied more than half of its
total financing.
3.4. CASH FLOW RATIOS

2000 2001 2002 2003

Cash Realization Ratio % 1.51 2.53 2.23 1.63
Cash Flow-Debt Ratio % 0.08 0.13 0.20 0.18
Cash flow analysis uses ratios that focuses on cash flow and how solvent, liquid and viable the
company is.
Dawson Stores cash realization exceeds 1.00, this indicates that the companys income is not
dependent on non-cash sources. This can be considered a good measure of earnings quality.

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However, Dawsons store debt load is higher than their operating cash flows, giving it a ratio of
less than one. Moreover, the percentage is considered low. In this instance, this circumstance
would indicate that the company has a weak capacity to cover its debt expenses with its operating
cash flow.

4. CONCLUSION/ RECOMMENDATION

Based on the financial analysis of Dawsons stores which started with the review of trend analysis
of its basic financial statements, results revealed that the financial position of the company is
improving and able to earn average profits during the past four years.
This can also be concluded by the ratios presented such as return on assets and return on equity.
Also the debt-equity ratio is also decreasing thus the risk associated with the company is also
reducing.
Thus, it is recommended that the bank approves the credit line that Dawson Stores Inc. is
requesting, as the company knows how to maximize its assets and has shown improving
profitability through the years. The long standing and untainted relationship of the Dawson Stores
Inc. and the bank is another factor that supports this recommendation.