USING COMMON SIZE DATA FOR CREDIT ANALYSIS You are the credit manager for Materials Supply Company. One of your sales staff has made a $50,000 credit sale to Stewart Electronics, a manufacturer of small computers.

Your responsibility is to decide whether to approve the sale. You have the following data for the computer industry and Stewart Electronics:

For the Years 2005–2009 Industry Stewart Electronics Average annual sales growth 13.4% 17.6%

Average annual operating income growth 10.8% 9.7%

Average annual net income growth 14.4% 9.9%

Average annual asset growth 10.3% 14.2%

Average debt to equity ratio 0.32 0.26 Average current ratio 4.04 3.71 Average inventory turnover ratio 2.53 2.06 Average accounts receivable turnover ratio 3.95 4.18 For Stewart Electronics, you have the following data for the year ended December 31, 2009:

Sales revenue $3,908,000 Net income 359,000 Total assets 3,626,000 Current ratio 1.82 Debt to equity ratio 0.37 Inventory turnover ratio 1.79 Accounts receivable turnover ratio 3.62 The salesperson believes that Stewart Electronics would order about $200,000 per year of materials that would provide a gross margin of $35,000 to Materials Supply if reasonable credit terms could be arranged.

Required:

State whether or not you would grant authorization for Stewart to purchase on credit and support your decision.