Clarkson Lumber Company Financial Analysis

Clarkson Lumber Company Financial Analysis

1. Background

Clarkson Lumber Company is owned and operated by the hardworking, 49-year-old Mr. Clarkson. It has low operating expenses, a small staff, and strong management. The overall impression is one of a conservative, efficient operation. Clarkson himself leads a frugal lifestyle with little personal debt.

The company has been in growth during recent years and anticipated a further increase in sales. Despite of consistent profits, the company has suffered shortage of cash and borrowed fund needed for its business growth.

2. Financial Analysis

See Appendix I, II & III. We find that increasing amount of borrowing despite of its consistent profitability came from following reasons. First is the firm’s financial position. As sales have increased by 55% from 1993-1995, the assets that support increase of sales increased by 78%. The increase amount of assets is over the amount of net income (addition to net worth). To meet financial needs, the company received short-term loans from bank, $60 in 1994 and $390 in 1995. The net profit margin and operating expenses ratio have been stable over three years, however, interest expenses has increased almost 1.5 times. The firm’s current ratio deteriorated again and as a result, the firm has experienced the shortage of fund regardless of its consistent profitability. Second is the amount of note payable against Holtz. Mr. Clarkson bought out Mr. Holtz’ interest for $200,000 paid off in 1995 and 1996. Because of this cash outflow, the company needed cash inflow from bank. Thirdly, the company’s collection period (48.95 in 1995 and 38.24 in 1993) and Avg Days in inventory (62.57 in 1995 and 55.86 in 1993) are deteriorated as well.

According to the cash flow statement in Appendix II, we know that the company has some main financing channel to meet the needs of fund. One is using the fund of suppliers, which increased the amount of A/P from $213,000 to $376,000 and the amount of N/P trade to $127,000. The other one is bank loan from Suburban National. But the ceiling of $399,000 in borrowing ability placed on the company by the Suburban National Bank is consistently insufficient to meet their growing needs.

We take leverage, liquidity, cash cycle and profitability measurement into consideration to analyze the financial performance of the Clarkson Lumber. Looking at the individual ratios seen in Appendix III and comparing it to the industry average gives a sense of where this company stands. We learn that the times-interest-earned decreased dramatically; on the contrary, the total debt ratio has been deteriorated and get closer to those low-profit outlets’ level. Meanwhile, the liquidity of the company decreased significantly. But the profitability seems to be steady and the ROE has risen to 0.17. All these ratios