Cartwright LumberEssay Preview: Cartwright LumberReport this essayAns 2Cartwright Lumber Company has had to borrow more and more money from the bank because of a short-term liquidity issue. This is evidenced by the following:When calculating the quick ratio for 2001 (0.88), 2002 (0.72), 2003 (0.67), and Q1 2004 (0.54) we observe that not only is it below 1 but it also decreases over time. The same can be observed with the cash ratio which decreases from 0.22 to 0.04 over a period of 3 years. In addition, the paper reads that suppliers’ payments are due in 30 days after the purchase but that Mr. Cartwright usually exceeds deadlines. If we look at the Cash Conversion Cycle we observe it is well above 30 days: 62.77 (2001), 63.24 (2002), 64.66 (2003), and 85.31 (Q1 2004). As can be seen from the Statement of Sources and Uses, the Uses of Funds are higher than the Sources and the firm has had to use its cash reserves to cover this gap, instead of using it for investment purposes.This liquidity problem could possibly be caused by two factors. Firstly, the company bought out Mr. Stark’s share by taking out a bank loan. This added additional burden in the form of interest and principal payments. Secondly, the company seems to be in a growth phase with the investments in fixed assets rising every year (126 in 2001, 162 in 2004 Q1).
Ans 3The ROCE and ROE show an upward trend which shows that the firm is increasingly using its capital more efficiently. However, the profit margin has declined despite an increase in sales. This could indicate that the firm’s expenses are increasing at a faster pace than its revenue. The firm’s short term loan obligations are noticeably going up as can be evidenced from the leverage ratios (liabilities become twice of equity in Q1 od 2004). Lastly, the Interest Coverage is also going down due to increasing debt. However, since it’s above 2, the firm is still in a secure position.Note: analysis of activity ratios and Statement of Sources and Uses of Funds has already been done in Question 2.
Ans 5The ROCE and ROE show an upward trend which shows that the firm is increasingly using its capital more efficiently. However, the profit margin has declined despite an increase in sales. This could indicate that the firm is increasingly using its capital more efficiently. Further, the Interest Coverage and/or Liabilities is increasing due to a decrease in equity in the past quarter as a result of the Company paying more interest from the account, more fees on account and less payment by financial institutions.
Ans 6A—B-C-D and C-E—E—D-F/—— have been declining from this growth. Although the firm continued to generate revenue at a higher rate than at previous periods, the trendline is not there yet. Further, the current market environment will have some detrimental effects. On aggregate, financial companies and their lenders were more likely to lend money to businesses that have a low debt and/or a high equity level and not have a good track record of paying off balances. These adverse impacts will not be seen through the balance sheet as financial assets have to be restructured and the firms have to maintain financial positions that are consistent with their capital structure. Furthermore, if growth continues at this pace, interest rates will have to rise more or be more high due to the higher credit rates of lenders. While growth in the S&P 500 Index was expected to be negative for the coming years, recent data indicated that the Index had contracted slightly with negative revisions to its current level. Therefore, the company that is currently trading at a near-negative level could be experiencing additional financial pressures. If the S&P 500 continues to decline, there may be further adverse consequences for the company for lenders. In addition, if it continues to decline to a similar level as the S&P 500, the company is expected to need to maintain some additional borrowing. However, because such borrowings are unlikely to be sustainable, these additional risks should be considered when seeking relief of indebtedness.
Ans 11In