Clarkson Lumber Company

           After years of operation, the Clarkson Lumber Company shows a rapid expanding in business. However, it was still confronted with the shortage of cash flows. Based on the analysis from financial statement,it is clear that there is an obvious distinction  between profit and cash requirement, leading to a high demand of financing.

1.  Profit was high but in low quality

          The increasing sales growth rate, increasing ROE and high net income growth rate shows high profitability of CLC. However, low profit margin shows that profit is in low quality. According to Dupont Analysis, increase in ROE can be mostly explained by the increase in Equity Multiplier. In other words, increase in ROE is backed up by high leverage, so high profit is misleading.

2. After analysing the cash flow statement of CLC, we found out some issues over cash as follows.

•  A/R:Data shows a 47% increase in account receivables. As the accounts receivables days  were increasing during this period and exceeding 30 days which is the trade credit provided to customers, CLC was troublesome in collecting cash into their company thus lead to lack of funds in their operating. Also, there showed an up trending in the ratio of Accounts receivables to sales, which are close to low-profit peers.

• Inventory:The changes of inventory should be based on the rate of sale. In the chart, we can see the inventory increase rate is much higher than sale increase rate, which means it spent more money on inventory than needed. See in percent of sales, the inventory of CLC increased from 11.54% in 1993 to 12.99% in 1995, the number is higher than the average inventory of high profit outlets. Also the inventory days of CLC is much higher than the inventory days of average high-profit outlet, which is about 42 days. Spending too much on inventory will make the profit even lower to face the difficulties of the company.

• A/P:Data shows a 11% increase in accounts payables from 1994 to 1995. The accounts payables days also increased and exceeded 30 days which is the trade credit provided by suppliers. According to this paper, in order to stay within credit line, CLC rely heavily on trade credit. So CLC has trouble in delivering cash to suppliers.