CASE STUDY

CASE #6:

HOLLY FASHIONS
RATIO ANALYSIS
summary
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HOLLY FASHIONS
➜ A firm of apparel maker smaller than Calvin
Klein and Liz Claiborne
➜ Founded 14 years ago by William Hamilton
and John White; they had over 25 years of
experience with a major garment
manufacturer
➜ Partnership between them initially blended
well
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William Hamilton
➜ Reserved and introspective
➜ Creative talent for merchandising and trend spotting;
resulting for the HF label to have quality and to be “in”
in fashion
➜ Had little interest in the financial aspects of the
company, prefers to work on designing new fashions
and the development of marketing strategies
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William Hamilton (cont.)

➜ Enjoys being an owner of an apparel firm
➜ Considering the sale of his 50 percent interest in HF
because of the cash crunches that HF has experienced
➜ Though few months ago, he decided that he had better
become involved with the company’s financials and it
is a good idea to educate himself in HF’s financials ->
to have a better judgment to White’s competence and
have idea about selling negotiation.
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John White
➜ Outgoing and forceful
➜ Has contributed important merchandising and
marketing ideas
➜ Assumed the duties of the firm’s chief
operating officer
➜ White makes all major operating and
financing decisions
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BORROWING CONCERNS
➜ White’s decision to retire all long-term debt, why?
• Triggered by White’s fear that the HF’s business risk is
increasing
• Possibility of a commercial business making
inadequate profits due to uncertainties like
changes in tastes, changing preferences of
consumers, strikes, increased competition,
changes in government policy, obsolescence
etc.
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BORROWING CONCERNS
➜ White’s decision to retire all long-term debt, why?
• HF have had difficulty maintaining stable bank
relationships
- Views bank debt financing as “unreliable”
- Thinks that loan officers are capable of
“chewing his time”
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BORROWING CONCERNS
➜ Hamilton is concerned that this debt avoidance has
significantly reduced HF’s financial flexibility because it
means that all projects will have to be equity financed
➜ There have been no dividends for the past five years because
all earnings have been reinvested
➜ Two years ago White and Hamilton had to contribute $15,000
of capital in order to meet the company’s cash needs
➜ Hamilton feels that the company is not benefiting from the
leverage effect of debt financing
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WORKING CAPITAL CONCERNS

➜ Hamilton suspects that HF’s inventory is “excessive” and
capital is unnecessarily tied up in inventory
➜ White position on inventory is to speed up delivery., large
inventory helps to give quick service
➜ HF consultant recommends to build a distribution center for
HF to aid the excess inventory but can still give quicker
service and will be able to handle big orders
- White rejected as it will cost $5-8million
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WORKING CAPITAL CONCERNS

➜ Hamilton also question’s White’s credit standards and
collection procedure
- 40% of the company’s receivables were 90 days
overdue
- But still continues to accept and delivers orders
from these customer
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WORKING CAPITAL CONCERNS

➜ Trade Discounts that is offered to HF
- 1/10, net 30
- White rarely takes the cash discount, “He
wants to hold onto cash as long as
possible”
- Notes that “the discount isn’t especially
generous”
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FINAL THOUGHTS
➜ Relationship between the two partners has
been relatively smooth over the years
➜ Hamilton discussed with two consultants the
possibility of selling half of the firm
➜ Consultants believe that HF is worth between
$55 and $65 per share
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CASE STUDY
QUESTIONS
1.) CALCULATE THE
FIRM’S 1996 RATIOS
LISTED IN EXHIBIT
3.
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%
 2.) PART OF HAMILTON’S
EVALUATION WILL CONSIST OF
COMPARING THE FIRM’S RATIOS TO
THE INDUSTRY NUMBERS SHOWN IN
EXHIBIT 3.
A. DISCUSS THE LIMITATIONS OF SUCH
A COMPARATIVE FINANCIAL
ANALYSIS.
B. IN VIEW OF THESE LIMITATIONS,
WHY ARE SUCH INDUSTRY
COMPARISONS SO FREQUENTLY
MADE?
a.

- These statements do not present the change in

various items in relation to total assets, total
liabilities or net sales.

- These statements are not useful in comparing

financial statements of two or more business
because there is no common base.

-The ratios being compared should be calculated

using financial statements that published in the
same date and same year.
B.

The use of ratio analysis for industry

comparison gives an idea about the
efficiency of the firm and how the
firm is doing compared to
competitors. Simply they can be
considered reference on your
company’s status as compared with
others in the industry.
 3.) HAMILTON THINKS THAT
THE PROFITABILITY OF THE
FIRM TO THE OWNERS HAS
BEEN HURT BY WHITE’S
RELUCTANCE TO USE MUCH
INTEREST-BEARING DEBT. IS
THIS A REASONABLE
POSITION? EXPLAIN.
EQUITY FINANCING

Advantages:
- Less risk
- Credit problems
- Cash flow
- Long term planning

Disadvantages:
- Cost
- Loss of control
- Potential for conflict
DEBT FINANCING

Advantages:
- Control
- Taxes
- Predictability

Disadvantages:
- Qualification
- Fixed payments
- Cash flow
- Collateral
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PROFITABILITY OF THE
FIRM TO THE OWNERS
WAS NOT HURT BY
WHITE’S RELUCTANCE
BUT IT WILL AFFECT
THE FIRM’S SOLVENCY.
4.) THE CASE MENTIONS
THAT WHITE RARELY
TAKES TRADE
DISCOUNTS, WHICH ARE
TYPICALLY 1/10, NET 30.
DOES THIS SEEM LIKE A
WISE FINANCIAL MOVE?
EXPLAIN.
- In the case of HF, which is a
small firm, the decision is
considered as a wise financial
move. Because of rarely taking
the discount, it will hold the
firms cash given that it will be
used for the firm’s operation.
While in general, this trade
discounts should be considered
because of the ff. advantages:

- Cost-effective
- Improve profits
- Increase your purchasing
power
 5.) CALCULATE THE
COMPANY’S MARKET-TO-
BOOK (MV/BV) RATIO.
(THERE ARE 5,000 SHARES
OF COMMON STOCK.)
- It means that the investors are paying $0.833 to $0.985
to each $1 of the book value of the Holly Fashions stocks.
6. ) HAMILTON’S POSITION IS
THAT WHITE HAS NOT
COMPETENTLY MANAGED
THE FIRM. DEFEND THIS
POSITION USING YOUR
PREVIOUS ANSWERS AND
OTHER INFORMATION IN THE
CASE.
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- Hamilton thinks that the profitability of the firms to the

owners has been hurt by White’s reluctance to use much
interest bearing debt.

- Hamilton suspects that HF’s inventory is “excessive”

and “capital unnecessarily tied again inventory”.

- Hamilton thinks that White has been generous in

granting payment extensions to customers.

- Hamilton wonders about the wisdom of passing up the

trade discount. Holly fashion is frequently offered terms
of 1/10, net 30.
7.) WHITE’S POSITION IS THAT
HE HAS EFFECTIVELY
MANAGED THE FIRM. DEFEND
THIS POSITION USING YOUR
PREVIOUS ANSWERS AND
OTHER INFORMATION IN THE
CASE.
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- White’s position in a large inventory is necessary

to provide speedy delivery to the customers.
White argues that the customer expects quick
service.

- White has been generous in granting the

extension of payments of customers because he
doesn’t want to lose sales.

- White rarely takes the cash discount, because he

thinks that the 1% discount is not generous on
their part.
 8.) PLAY THE ROLE OF AN
ARBITRATOR. IS IT POSSIBLE
BASED ON AN EXAMINATION
OF THE FIRM’S RATIOS AND
OTHER INFORMATION IN THE
CASE TO ASSESS WHITE’S
MANAGERIAL COMPETENCE?
DEFEND YOUR POSITION.
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Yes, because White’s actions and decisions

will first reflect in the financial statements
and then to the firm’s ratio and all other
information for being part of the firm,
managing the major operations and
participating in financial decisions. White’s
actions and decisions make the ratio analysis
with different year’s lots of ups and downs
such as granting the extension for payment
by the customers and rarely taking the cash
discounts.
 9.) A. ARE THE RATIOS YOU
CALCULATED BASED ON
MARKET OR BOOK VALUES?
EXPLAIN.
B. WOULD YOU PREFER
RATIOS BASED ON MARKET
OR BOOK VALUES? EXPLAIN.
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A.

All the computed ratios are

based on the Book value,
which was recorded at the
books of the firm.
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B.

Both book and market values offer

meaningful insights into a company's
valuation. Comparing the two can
help investors determine if a stock is
overvalued or undervalued given its
assets, liabilities, and ability to
generate income.
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RECOMMENDATIONS
 “
➜ Throughout the case we find
that Hamilton and White have
two different professional
background and both wanted
to take part in decision making
so they differ in some
argument.
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So we can say that..

➜ Since the company is going through tough times,
Hamilton should reduce the risk of not selling the
company share.
➜ As Hamilton was from creative site so he should
generate new idea to diversify their product.
➜ White is always working with customers, he has the
opportunity to maintain customers’ satisfaction so he
should focus more on that field.
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So we can say that..

➜ Hamilton and White working together since 14 years, if
they want to run their firm in a proper way they should
keep their personal conflicts aside.
➜ Holly Fashions should consider hiring a financial
manager to oversee the finances of the company.
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So we can say that..

➜ On Borrowing Issue – It will be good if the firm will be
financially flexible by having a long-term debts, so that
the firm will not be dependent on owners investment. It
also has retain control, tax and easier planning
advantages.
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So we can say that..

➜ On working capital issue
- They can make a contract where the date of delivery after
placing of order is indicated at a minimum lead time.
- Distribution Center can also help with the company but proper
capital investment planning will help. Consider consulting to
management accountant.
- Buffer stock/Buffer Safety Inventory
- Reduce the excess inventory as it may lead to:
- Large storage cost
- Obsolete inventory
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So we can say that..

➜ Collection Policy
- Consider giving cash discount to customer
- And a contract for customer’s strict compliance to
payment as it will lead to non-delivery of orders
until account is settled.
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thanks
ROMA ELAINE DELA CRUZ
JEAN IRA AGUILA
ROCELO BUCAD JR.