Burchetts Green had enjoyed the bank training course, but it wasgood to be starting his first real job in the corporate lending group.Earlier that morning the boss had handed him a set of financialstatements for The Hobby Horse Company, Inc. (HH). “HobbyHorse,” she said, “has a $45 million loan from us due at the end ofSeptember, and it is likely to ask us to roll it over. The companyseems to have run into some rough weather recently, and I haveasked Furze Platt to go down there this afternoon and see what ishappening. It might do you good to go along with her. Before yougo, take a look at these financial statements and see what you thinkthe problems are. Here’s a chance for you to use some of that stuffthey 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 materialsfor crafts and hobbies. However, last year a number of new storeopenings coinciding with a poor Christmas season had pushed thecompany into loss. Management had halted all new constructionand put 15 of its existing stores up for sale.Mr. Green decided to start with the 6-year summary of HH’sbalance sheet and income statement (Table 4–11). Then he turned toexamine in more detail the latest position (Tables 4–12 and 4–13).What appear to be the problem areas in HH? Do the financialratios suggest questions that Ms. Platt and Mr. Green need toaddress?108 Part One Introductionwww.mhhe.com/bmm6e2008 2007 2006 2005 2004 2003Net sales 3,351 3,314 2,845 2,796 2,493 2,160EBIT 9 312 256 243 212 156Interest 37 63 65 58 48 46Taxes 3 60 46 43 39 34Net profit 49 189 145 142 125 76Earnings per share 0.15 0.55 0.44 0.42 0.37 0.25Current assets 669 469 491 435 392 423Net fixed assets 923 780 753 680 610 536Total assets 1,592 1,249 1,244 1,115 1,002 959Current liabilities 680 365 348 302 276 320Long-term debt 236 159 297 311 319 315Stockholders’ equity 676 725 599 502 407 324Number of stores 240 221 211 184 170 157Employees 13,057 11,835 9,810 9,790 9,075 7,825TABLE 4–11 Financialhighlights for The Hobby HorseCompany, Inc., year endingMarch 31TABLE 4–12 INCOME STATEMENT FORTHE HOBBY HORSE COMPANY, INC.,FOR YEAR ENDING MARCH 31, 2008(all items in millions of dollars)Net sales 3,351Cost of goods sold 1,990Selling, general, and administrative expenses 1,211Depreciation expense 159Earnings before interest and taxes (EBIT) 9Net interest expense 37Taxable income 46Income taxes 3Net income 49Allocation of net incomeAddition to retained earnings 49Dividends 0Note: Column sums subject to rounding error.