Cartwright Lumber

Ans 2

Cartwright 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 3

The 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.