FIN 320 Module 3 Project Milestone One example

Project Milestone One: Can Brightwater Pay Its Bills? Liquidity and Solvency of a Composite Pet Supply Retailer

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Southern New Hampshire University

FIN 320: Principles of Finance

Module Three Project Milestone One

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[Date]

The organization, setting and figures below are a composite written as a model document. No real employer, client, colleague or patient is described.

Project Milestone One: Can Brightwater Pay Its Bills? Liquidity and Solvency of a Composite Pet Supply Retailer

The Company

Brightwater Pet Supply, Inc., the composite company chosen for this project, is a specialty retailer listed on a public exchange that sells pet food, supplies and grooming services through about 240 stores and a growing online business. In fiscal 2025 it reported net sales of 1.97 billion dollars, net income of 66.1 million dollars and total assets of 1.11 billion dollars. It was chosen for this project because it faces a common problem for growing retailers: sales are rising, but inventory and debt are rising faster, and the market has noticed, with the share price falling from 41.50 to 36.80 dollars during the year. Its statements therefore offer a real test of financial health rather than an easy success story.

Liquidity

Liquidity measures the ability to meet obligations due within a year. Table 1 shows three measures for fiscal 2024 and 2025 (Dahlquist & Knight, 2022).

Table 1

Liquidity Measures, Brightwater Pet Supply

Note. Composite figures. Current assets were $410 million and $454 million; current liabilities were $276 million and $305 million; inventory was $286 million and $338 million.

Interpreting Liquidity

At first glance, liquidity looks stable. Working capital grew by 15 million dollars and the current ratio held at 1.49, meaning current assets cover current liabilities about one and a half times. The quick ratio tells a different story. With inventory removed, Brightwater had only 38 cents of cash, receivables and other quick assets for every dollar of current liabilities in 2025, down from 45 cents. The current ratio stayed flat only because inventory rose to fill the space that cash used to occupy. For a retailer, inventory is not worthless, but it must be sold before it can pay a bill, and slow-moving pet supplies may need discounts to sell. A quick ratio well below 1.0 is common among retailers, since they turn inventory into cash continuously, but the downward trend deserves attention.

Why Liquidity Is Tightening

The quick ratio's decline has a mechanical cause that can be measured. Dividing inventory by cost of goods sold and multiplying by 365 shows that Brightwater held about 87 days of inventory at the end of fiscal 2024 and about 95 days at the end of fiscal 2025, eight more days of goods sitting on shelves and in distribution centers. Over the same period, accounts payable fell from about 49 to 48 days of cost of goods sold, so suppliers were not financing the extra stock. The gap between how long inventory sits and how long the company takes to pay for it widened by about nine days, and at Brightwater's volume each day represents roughly 3.5 million dollars of cost of goods sold. That is the practical reason cash fell by 13 million dollars and short-term borrowing rose by 15 million dollars: money that used to return from customers within the year is now tied up in unsold goods. A retailer with this pattern does not have a liquidity crisis, but it has a liquidity drift, and drifts are easier to correct early.

Solvency

Solvency measures the ability to meet obligations over the long term and the extent to which the company relies on borrowed money. Table 2 shows three measures.

Table 2

Solvency Measures, Brightwater Pet Supply

Note. Composite figures. Total liabilities were $660 million and $748 million; equity was $350 million and $364 million; operating income was $110.4 million and $108.4 million; interest expense was $18.2 million and $21.4 million.

Interpreting Solvency

Liabilities now fund about two-thirds of Brightwater's assets, up two points in a year, and for every dollar of shareholders' equity the company owes 2.05 dollars. Part of this reflects long-term store leases and other obligations common in retailing, but the increase came from new borrowing: short-term and long-term debt rose from 330 million to 400 million dollars. Interest coverage weakened as a result. Operating income fell slightly while interest expense rose 18 percent, so the company's earnings covered interest 5.1 times in 2025 compared with 6.1 times in 2024. Coverage of five times still gives a comfortable cushion; lenders often become concerned when coverage falls toward two or three times. The direction, however, is what matters for a company that is still borrowing (Ross et al., 2022).

A Stress Test

To see how sensitive these conclusions are, suppose one-tenth of the year-end inventory turns out to be slow-moving and must be sold at 30 percent below cost. The loss would be about 10 million dollars, reducing operating income from 108.4 million to about 98.3 million dollars. Interest coverage would fall to about 4.6 times, still adequate, and the current ratio would dip slightly as inventory is written down. The company would remain solvent. The test shows that Brightwater's position can absorb a moderate inventory problem, but also that the cushion is thinner than a year ago, and a second year of the same pattern would leave much less room.

Judgment

Brightwater can pay its bills today. Its current assets exceed current liabilities by 149 million dollars, and its operating earnings cover interest five times over. But its liquidity has become more dependent on selling inventory, and its solvency is weakening as it borrows to carry that inventory. If sales continue to grow and the inventory sells at normal margins, these trends will reverse. If the inventory build reflects products customers are not buying, the company could face a squeeze: markdowns would reduce margins and cash at the same time that interest costs are rising. The balance sheet is sound but moving in the wrong direction.

Next Steps for the Project

Milestone Two will extend the analysis to profitability, efficiency and market measures, including earnings per share, the price-to-earnings ratio and inventory and asset turnover, and will compare the company's results with the prior year in more detail. That work will show whether the inventory build is reducing efficiency and whether investors' lower valuation of the shares reflects the trends identified here. Industry averages for specialty retailers, drawn from a financial database, will be added so that Brightwater's ratios can be compared with its peers as well as with itself (Graham & Harvey, 2001).

References

Dahlquist, J., & Knight, R. (2022). Principles of finance. OpenStax. https://openstax.org/details/books/principles-finance

Graham, J. R., & Harvey, C. R. (2001). The theory and practice of corporate finance: Evidence from the field. Journal of Financial Economics, 60(2-3), 187-243. https://doi.org/10.1016/S0304-405X(01)00044-7

Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2022). Fundamentals of corporate finance (13th ed.). McGraw Hill.