Submitted by: Submitted by muru513
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Category: Business and Industry
Date Submitted: 11/12/2010 09:02 AM
Financial Analysis
Clarkson Lumber Company
Clarkson Company has been a profitable company with forecasted sales of 5.5 mil in 1996. The EBIT profit margin has been fairly steady from 1993 to 1996. The company has good standing in the industry. However, the company is currently in need of external financing to maintain projected sales growth.
Clarkson lumber has a liquidity issue (Appendix 1). It is strapped for cash and thus needs external financing.
* The current ratio in 1993 was 2.49 - in par with high profit companies in the industry. However, the ratio sharply declined in 1995 to 1.15 - lower than low profit companies in the industry.
* The debt to equity ratio has also increased from 0.82 in 1993 to 2.65 in 1995. The working capital has also declined sharply from $411,000 in 1993 to $161,000 in 1996.
Clarkson Lumber is strapped for cash due to operating inefficiency (Appendix 1)
* Inventory as a percentage of sales has increased from 11.54% in 1993 (in par with high profit companies in the industry) to 12.99% in 1995 (higher than low profit companies in the industry).
* Clarkson’s debt position has also drastically increased from 1993-1995. A current liability as a percentage of sales has increased from 29.92% in 1993 to 66.46% in 1995. The company is highly leveraged with debt financing from banks and other sources.
* The inventory turnover has declined from 6.53 times in 1993 to 5.83 times in 1996. The company is unable to move inventory quickly and effectively through the production process in order to generate final product and thus sales.
* Clarkson is unable to quickly convert their accounts receivable into cash creating, among other things, the need for external financing. DSO has increased from 38.24 days in 1993 to 48.95 days in 1995. Also, Clarkson’s cash conversion cycle has increased from 58.21 days in 1993 to 63.18 days in 1995. Again, this creates the need for external financing, as Clarkson is not able to...