ClarksonLumber Financial Analysis
6thJune 2016
PART1
ClarksonLumber Financial Analysis
ClarksonLumber is a retail distribution company that focuses its sales onlumber products in the local area. This analysis gives a brief butconcrete analysis on its internal financials of the firm. It tries toexplain the heavy borrowings and credits it is experiencing and whyit is a major problem for the Clarkson Corporation. It will alsocompare the 1996 financial analysis with its 1995 financial analysisas its standard. The current ratio and the debt position are the mainanalysis that this paper would undertake since Northrop National Bankhad a particular interest in these two items.
TheDuPont analysis conducted and based on the selected statistics showedthat the current liabilities and its long-term liabilities arealarming and are on an increasing end while its Return On Equity(ROE) is diminishing. It’s a major problem issue on the Clarksoncompany, and it poses questions on whether these liabilities wouldproperly be covered by the assets. The ROE expresses the firm`sprofitability, asset efficiency, and leverage:
ROE
NetProfit Margin Asset Turnover Equity Multiplier
Followingthe figures of both years and given in their annual reports, we,therefore, have the ROE as:
For1995:
=17.1%
For1994:
=18.3%
Thestandard year, 1995 had the highest ROE, which means that theshareholders earned more as compared to 1994 as the base year. Sincethe company had not issued the preference shares, the ROE was only onthe common stock. Had it issued its ordinary and preferred stock,then investors would have modified the formula by adding preferreddividends to the reducing shareholder’s equity and the net income.
ROEis widely used by most investors and it vividly measures thecompany’s general performance the industry considers a rate thatis between 14% – 21% as attractive to any investment. However, theROE must be noted since it vividly shows how the company performs itsprofitability, it has a major weakness any changes that affect thecapital structure doesn’t have an impact on the items of the ROE,in any case, they would be disproportionate and would still bring amodest percentage.
Sincethe ROE points out to the profitability, this analysis also focuseson it but rather on other financial ratios that affect theliabilities and the capital structure. The liquidity ratios, workingcapital ratios, interest coverage ratios, leverage ratios, valuationratios and operating returns. The analysis would discuss a few majorrates that would give a direction of the company’s overallmanagement.
Thefollowing are how I calculated my ratios analysis:
Liquidity ratios
1995:= 1.15
1994: = 1.58
The current ratio is decreasing and therefore means that rate of the company paying debts over its assets is decreasing at a rate that is not favorable. A higher ratio is to be encouraged to be maintained. It means the company can’t efficiently finance its short-term obligations activities with its current assets
The quick ratio is also seen to be increasing the firm can now pay its liabilities with more cash and other securities which can be turned into cash easily.
WorkingCapital Ratios
1995:= 48.9 days
1994:= 43.1 days
It’s increasing the company would wait longer, in 1995, to receive debts than the previous year.
1995:= 115.0 days
1994:= 147.2 days
It decreased in 1995 the borrowed money can be returned not so soon as compared to 1994
1995:= 210.7 days
1994:= 189.2 days
Increased the number of days that would take to bring in a new stock.
1995:= 7.46
1994:= 8.46
Decreased: means the company had poor collecting process or had bad customers in 1995. In essence, the receivables turnover ratio shows how the credit of the firm is managed. The highest ratio on this is preferred.
1995:= 7.698
1994:= 8.049
Reduced: In means that more inventory was made but no major increase in sales. Higher rate on this urged to be used.
OperatingReturns
1995:=2.761
1994:= 3.005
Reduced: Fewer sales were made after more stock was brought in. The firm is not performing at its best. Higher rate on this urged to be used.
The earnings from the invested capital decreased. The one with a higher percentage is to be used. It is the major comparative ratio that is widely used in public companies.
LeverageRatio
1995:= 2.64
1994:= 2.11
Increased:the firm is aggressive on financing its growth with the use of debt.A higher ratio is always encouraged to be used.
1995:= 0.7257
1994:= 0.3215
Increased: the company used its most of its debts to finance long-term projects and has more debts as compared to equity. The firm can fund its operations through equity and debt. An idea of a company’s financial structure is given by this ratio. A higher ratio means more debt the company has compared to its equity it answers the question, is it more equity funded or debt funded? A higher ratio on this should always be used.
1995:= 3.65
1994:= 3.11
Increased: It means that more assets were acquired using equity. Over half of the assets were acquired by equity alone. A low equity multiplier is not essentially better than a high multiplier. It offers assistance to know which financing option is better and it is also an indicator of a financial threat that may arise due to economical reason like inflation that affects the debt-equity mix.
PART2
Overallsummary
Mr.Dodge as the lead manager in deciding the creditworthiness ofClarkson’s firm should offer the revolving, secured, 90-day notethat should not exceed $750,000 and subject to the stipulatedprovisions. The company, in 1995 and generally in the first quarterof the 1996 financial year, was generally doing well in all sectorsas seen by its high leveraging and liquidity ratios, favorableworking capital structure and good interest and operating returnsratios. The company should try maintaining the good equity financingand collection process, and having a more improved capital system.
Exhibit1
Exhibit2