Carlson Trust Company of Richmond, Virginia has a long-term banking relationship with Padgett Paper Product's Inc. Historically Padgett has performed more or less seasonal transactions with Carlson Trust, smaller short-term loans and tax payments. But, as a result of inflation and a recent acquisition of a competitor (Tri-State Tablet Company), Padgett Paper Products, Inc's financial needs have risen to a permanent level rather than being merely seasonal in nature. Management (Libris) at the company's bank must revise Padgett's debt structure in a mutually satisfactory manner. Because Libris was on a deadline to reflect the new debt structure on the books? I feel that he rushed his preliminary fancy agreements?to Padgett, nearly
…show more content…
Padgett has had an increasing return on equity, but that is mainly due to the increased leverage the firm has taken on, not by an increased profit margin or total asset turnover, these have stayed steady (chart attached). Essentially, a firm that increases ROE by taking on more debt also increases the probability of financial distress. With this in mind, the interest coverage ratio over the past few years has decreased significantly, even with the adjusted forcasts, the interest coverage ratio doesn't go above 12.6 where historically Padgett has been as high as 115.9x (1994). Unfortunately, the case does not give comparables to see what the industry averages are, I think that the drastic decrease in the interest coverage ratio needs to be addressed by the lender. In addition, the ROA for Padgett has trended downward in the past few years, although, they do rise back to the 1993 level of 10.7 with updated forecasts (10% growth & 15% growth only).
All in all, I think Padgett Paper Products needs help in a couple different areas. One consideration the firm should have is the hiring of a qualified, experienced CFO to help get the company more financially sound so that the owner's may continue to grow the firm by acquisition. Secondly, the firm may want to seek an actual banker, rather than just a lender. Unfortunately a lender can only do so much, where a banker can help the company guide itself into a more financially sound firm. Although Padgett's owner's are not a fan