A business and financial analysis of Cartwright Lumber Co. and the company's need for additional funding.
Thomas R. Piper
Harvard Business Review (204126-PDF-ENG)
February 12, 2004
Case questions answered:
- Describe briefly the segment of the lumber business Cartwright operates in and the key success factors for operating in this segment. Do not comment on Cartwright specifically, but on key components of a successful strategy for any lumber business.
- How well is Cartwright Lumber Co. doing from an operational (as opposed to financial) standpoint? Report Key Performance Indicators (KPIs) where appropriate. KPIs are data points. Financial analysis Now, turn to some financial issues.
- Describe Cartwright’s financial policy over the past few years. In particular, how have leverage and liquidity been evolving? Where possible, back your statements with numbers.
- Why does Mr. Cartwright have to borrow money to support his business? a)Prepare a Sources and Uses Statement comparing 2001 to the first quarter of 2004. This helps you get a rough picture of where funds are coming from (Sources) and where they are going (Uses). This is not a Cash Flow Statement. To construct the Sources and Uses Statement: - Compare Cartwright Lumber’s Balance Sheets in 2001 and 2004Q1 (not referencing the Balance Sheets in 2002 or 2003) - Classify each Asset that has increased/decreased as a Use/Source - Classify each Liability (and Net Worth) that has increased/decreased as a Source/Use. What are Cartwright’s main Sources and Uses of funds? b) You should also compute and study those ratios that, in your view, can help explain Cartwright’s current situation of seeking more funding. In particular, where you can, try to assess roughly how much (both in dollars and as a fraction) stem from Mr. Cartwright’s past growth strategy vs. his having been running his business less efficiently over time.
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Cartwright Lumber Co. Case Answers
This case solution includes an Excel file with calculations.
Introduction – Cartwright Lumber Co.
We have compiled an analysis of Cartwright Lumber Co. and divided it into two areas of focus. First, we did a business analysis, then a financial analysis of the company.
The business analysis for Cartwright Lumber is positive. It has found a geographic location that provides plenty of business with certain downside protection from its approach towards customer demographics. Overall, we view the business trends as positive and contributing to a successful company.
The financial analysis reveals certain issues that are becoming apparent and will be more limiting to the company’s expansion in the near future. Nevertheless, the company remains profitable, and customer satisfaction is strong. Therefore, we recommend particular attention be paid to the debt structure of the company.
Q1. Describe briefly the segment of the lumber business Cartwright operates in and the key success factors for operating in this segment. Do not comment on Cartwright specifically, but on key components of a successful strategy for any lumber business.
The lumber products industry is typically known as a “low-margin industry.” This is because raw materials used in manufacturing are highly subject to global commodity prices — especially from demand emanating from China and South Korea.
Firms that succeed in the industry are typically adept at operational excellence, unique/new product design, value chain optimization, and pricing optimization.
It is essential for companies to pay close attention to their customer base and their local economies on a local scale. Therefore, managing their inventory and production to not exceed demand is crucial.
This industry is also recognized as being highly cyclical, with most of the annual revenues coming from a six-month span of April – September.
Lastly, the industry has undergone considerable consolidation. The industries at play typically consist of Tree Farms, Lumber Mills, and Wood Product Manufacturers. Very few are fully integrated, but some of the market leaders are.
Q2. How well is Cartwright Lumber Co. doing from an operational (as opposed to financial) standpoint? Report Key Performance Indicators (KPIs) where appropriate. KPIs are data points. Financial analysis Now, turn to some financial issues.
(See Operations Metrics Table in the appendix for additional detail)
Barker, one of Cartwright’s suppliers, notes that Cartwright has a strong asset turnover due to its management. Cartwright’s inventory turnover moved from 5.11 in 2001 to 3.76 in Q1 2004 (Q1 performance extrapolated to a full year to compare against balance sheet inventory). This downward trend is concerning and may indicate some operational difficulties.
Customers are offered Net 30 terms on accounts. Assuming that all sales are on credit, the collection period has gone from 36.78 days in 2001, increasing each year to 43.85 days in Q1 2004 (Q1 performance extrapolated to a full year).
On average, customers are not receiving discounts for the Net 30 payment terms, and Cartwright Lumber Co. is not…
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