Woodside Case Study

Synopsis:

James Thomas, senior loan officer of the Community State Bank of Waukesha, Wisconsin received an alert on the deteriorating financial condition of Woodside Forest Products Corporation (Woodside). Woodside is a major customer of Community State Bank. Woodside is in danger of defaulting on their loan because they are not meeting provisions. The terms of the loan contract gives Woodside 15 business days to remedy the situation, or at least develop a plan to sufficiently convince the lender that they will be able to pay the debt. Community State Bank must make a decision as to if they are going to call or not call the short term loan based on Woodside’s proposed plan. To help them decide they must assess Woodside’s strengths and weaknesses.

Analysis:

Liquidity measures are used to evaluate a company’s ability to pay its bills on time. The two commonly used ratios that help to evaluate this are the current ratio and the quick ratio. Woodside’s current ratio for 2010 was 1.77 which is a decrease of 0.73 from the industry average. As explained in the case study and reflected on the balance sheet, we already know the inventory is not in equilibrium with demand. The inventory is in excess of demand which is evident because the current ratio exceeds 1.0. The current ratio is significantly lower than the industry average. Bank debt and accounts payable have increased substantially to finance the much higher levels of inventory. Woodside’s quick ratio has declined from a level that is extremely comfortable to one that is merely comfortable. This presumes that the terms of the bank debt are not burdensome and that the company’s very heavy investment in inventory proves to be profitable in the future.

Working capital management ratios assist a company in evaluating its performance regarding the management of the credit function and inventory. Woodside’s days’ sales outstanding for 2010 was 54.84 or about 55 days which is a significant increase. Woodside is...