Hampton Machine Tool Company Analysis

774 Words May 4th, 2012 4 Pages
Student ID#: 285
Firm: Hampton Machine Tool Company
Nature of business: Machine Tool Manufacturing
Overview
Hampton Machine Tool Company was founded in 1915 and experienced record production and profitability throughout the years despite hard economic times for the machine manufacturing business. Sales declined throughout the mid 1970’s from the post Vietnam War demand, the declining automobile industry in St. Louis, and the gas embargo of the early 1970’s. Hampton did eventually recover due to an increase in military sales, the automobile industry rising, an overall improvement in the economy. Hampton is looking to take out a line of credit of $1,000,000 and an additional loan of $350,000 to purchase equipment, and an extend
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From November 1978 to August 1979 inventory represented 42% of total expenditures. Inventory levels need to be addressed first in order to see its cash flow problems more clearly. Accounts Receivable needs to be addressed as the company’s collection method of net 30 seems t
Financing
Due to the seasonality of the company’s sales, the riskiness of the company has increased starting in August. Quick Ratio numbers have dropped significantly from 0.76 in June to 0.49 in August. This is in large part due to the drop in accounts receivables and the increase in accounts payable. The repurchase of company stock by taking out a loan of $100,000,000 and using $2,000,000 in excess cash has severely impacted the company’s ability to repay its loans. This repurchase was 58% of total expenditures from November 1978 to August 1979. This was a major cause to the delay in repaying its loan.
Summary
Hampton Machine Tool Company has had financial strain to its cash position from an economic recession that forced them to put off buying new equipment. The company also purchased $420,000 in excess raw materials and had problems with its suppliers forcing them to halt work orders and wait on electronic mechanisms to be delivered. These supply chain problems are a major cause for concern and a worst case scenario needs to be implemented before a bank can make any decision as to whether or not a credit line should be extended. This issue could send a signal to shareholders

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