Why Has Clark Lumber Borrowed Increasing Amounts Despite Its Consistent Profitability?
Why has Clark Lumber borrowed increasing amounts despite its consistent profitability?
Despite Clarksons Lumber consistent profitability over the years, they have seemed to run into a tight situation where they are having difficulty producing a steady cash flow stream. If you look at the selected statistics in Appendix III, you can see that Clarkson Lumber has cash as a percentage of sales ranging from 1%-2% from 1993 to 1995. Even though the Return on Equity from 1993 to 1995 has steadily improved, one can see that the companys profitability and liquidity has deteriorated due to the rapid growth in the company. With this rapid expansion in sales, Clarkson Lumber has needed to borrow funds in order to keep up with the pace of growth. Even though Clark Lumber has showed some consistent profitability over this period, their Profit Margin of 2%, which can be seen in Appendix III, is a little short of spectacular. By looking at Clarkson Lumbers Current Ratio, any investor can tell that this company has had a decreasing ability to meet any maturing obligations that may come due within the year. It has decreased from 2.49 times to 1.15 times in just a span of 2 years. We cannot just base our analysis on Return on Equity and Return on Assets, but must look at other factors such as the companys ability to collect from customers and their ability to pay their vendors.
A good explanation as to why Clarkson Lumbers cash cycle is struggling in its most recent year of business is the fact that their Accounts Receivable Turnover has increased from 38 days in 1993 to about 49 days in 1995, which can also be seen in Appendix II. This means that it takes the firm, on average, an extra 11 days to collect from their customers. With a rapidly growing firm that needs as much cash infusion as it can possibly get it, this is an area of improvement that they need to work on. What makes things worse for this company in its current state is that its Accounts Payable Turnover has increased tremendously to 50 days compared to just 33 days in 1994. This means that it takes Clarkson Lumber an extra 17 days to pay back its vendors for the purchases they have made. With purchases increasing 31.1% from 1994 to 1995, it is no wonder why they are borrowing increasing amounts just to keep up.
How has Mr. Clarkson met the financing needs of the company during the period 1993 through 1995? Has the financial strength of Clarkson Lumber improved or deteriorated?
Clarkson Lumber has met the financings needs of company from 1993 to 1995 by having to take on several liabilities on their books, mainly due to a couple of events. The first event was that Clark Lumber decided to buy Mr. Holtzs interest in the company and had to pay off $200,000 in 1995 and 1996. To help with the financing needs of the company, Clark Lumber had to receive short-term loans in the amounts of $60,000 in 1994