Clarkson Lumber Case Study

2838 Words12 Pages
CLARKSON LUMBER CASE STUDY B RADY CLIFFORD • DAN HORTON • EMIL HYMAS Y • RICH WILKINSON EXECUTIVE SUMMARY Clarkson Lumber Company, owned by Mr. Keith Clarkson, has been in business for 15 years and currently has 15 employees. Firms who have worked with Clarkson speak very highly of him, saying that he is conservative and his operating expenses are low. The company’s revenues are projected to continue to grow. Recently, Clarkson Lumber’s accounts payable and notes payable have increased significantly. The company has not been able to take advantage of trade discounts in recent years because of lack of funds and because of investments due to the company’s growth. While Clarkson Lumber has been increasingly…show more content…
Even with the growing trade debt, CLC still was comparable to the overall percentages of other lumber outlets (see Exhibit 3). It is also important to recognize specific ratios related to the company. The current ratio, which is helpful in understanding asset liquidity or inefficient use of cash flow, decreased from 2.5 in 1993 to 1.1 in 1995. High-profit companies have a current CLARKSON LUMBER CASE STUDY - FINAN 6022-002 • PAGE 2 ratio of 2.52. ROE for Clarkson Lumber remains relatively steady; it increased from 1993 to 1994 but decreased to 17.1% in 1995. This ROE is only slightly lower than the ROE for high-profit companies which is at 22.1%. After reviewing Clarkson Lumber’s financial situation, several key issues became apparent. First, the company is clearly growing at an unsustainable rate. Exhibit 3 (various statistical ratios), shows the average internal growth rate of the company at 6.06% and the average sustainable growth rate at 15.78%. However, over the three full years analyzed, the company has an average growth margin of 24.5% and an average asset growth margin of 33.69%. This continues in the forecasted 1996 year as the company is projected to increase revenue by roughly 21.7%. At the company’s current level, it cannot continue to support its current growth rate going forward and will require more debt to finance this growth. Therefore, the company seems to be overly reliant on short term financing for its operations.

More about Clarkson Lumber Case Study

Get Access