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 got 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. Heres a chance for you to use some of that stuff they taught you in the training course.

Burchetts 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. Burchetts decided to start with the 6-year summary of HHs balance sheet and income statement (Table 1). Then he turned to examine in more detail the latest position (Tables 2 and 3).

Required

a) What appears to be the problem areas in HH?

b) Do the financial ratios suggest questions that Ms. Platt and Mr. Green need to address?