Clarkson Lumber Analysis

1061 words - 5 pages

The Clarkson Lumber case is about Mr. Clarkson seeking a loan that does not require a personal guarantee. The Northrup National Bank is in the process of investigating the Clarkson Lumber Company to whether or not to extend a line of credit of $750,000. However, Mr. Clarkson was only seeking for fewer amounts; thus, he assumed the line of credit would be an advantage to generate more profits into his company. In addition, The Clarkson Lumber Company is waiting on its approval based on its financial statements. Therefore, I believe Northrup National Bank should not extend the line of credit to Mr. Clarkson and his company due to the company’s highly leveraged.
In 1993, a financial ratio of ...view middle of the document...

Having less equity each year also means fewer earnings to its shareholders.
The Clarkson Lumber Company’s profitability was relatively low in 1993 and continued to decrease year after year. First, the company had a 2.05 percent return on sales, which was quite low to begin. Second, it had a huge decrease from 1.70 percent to 0.47 percent in return on sales in 1996. These percentages show the Clarkson Lumber Company is not capable of earning or producing more profit for its company or its shareholders. The company was relatively far from earning a dollar from profits. Therefore, how a company like Clarkson will be able to manage a line of credit of $750,000 when the company is not generating nearly enough profit to be approved. On the other hand, the gross profit margin remained within the same range each year and had 24.76 percent at the end of 1996. This signifies that the Clarkson Lumber Company would continue to have 0.24 cents from every dollar the company produced in whom the company will use to pay off its expenses and allocate it to its shareholders.
The Northrup Bank investigator had predicted that Clarkson would reach $5.5 million in sales in 1996. However, this was not accurate after making a few calculations that resulted in a $4.7 million in sales. I believe that Northrup Bank was only viewing the positive outcomes of the Clarkson Lumber Company since banks earn a profit by simply lending to other firms. Sales did not increased after However, Mr. Clarkson’s financial statements fail to show a sign of prosperity.
Clarkson Lumber Company has not been performing well according to its return on assets. The company went from having a 6.53 percent in 1993 to a 1.37 percent in 1996. This major downfall illustrates that the company is not doing an exceptional job in managing its investments to produce profit or sales. As each financial ratios continued to decrease, the Net Income was also decreasing rapidly; it decreased $55,000 from one year...

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