He has taken very few purchase discounts for the last two years. In order to mitigate this situation, we strongly recommend Clarkson to manage its account receivable more efficiently and increase the liquidity to shorten day's account payable. .
Leverage .
The debt to net worth indicator shows that the company has a more risky financial structure. The leverage increased to 2.11 from 0.82 because Mr. Clarkson borrowed money to buy out Mr. Holtz's shares in the company. The leverage raised to 2.65 in 1995, which gives us a signal that the company is more likely to default. .
Activity Ratio.
Clarkson Lumber Company has a poor account receivable management. Days receivables was getting worse from 38.24 in 1993 to 48.95 in 1995, and remain at this level in 1996 and 1997. A high ratio means a longer time to collect cash from customers. In addition, Days inventory also extend 5 day in average from 48 days in 1993 to 53 days in 1997. The prolonged Days inventory encumbered the ability to sell products. The company strikes to shorten the Days payable within 10 days to enjoy a 2% trade discount. .
Liquidity .
We need pay attention on the liquidity of the company. The current ratio dropped to 1.15 in 1995 from 2.49 in 1993. The main reason for this reduction is because Mr. Clarkson bought shares from Mr. Holtz. It resulted in a shortage of cash. The quick ratio also dropped to 0.61 in 1995. Although the company can improve this situation, it's still below the 2:1 and 1:1 level, which indicates a stressful liquidity. When we look at the statement of cash flows, the situation is rather obvious. The cash from operating cash flow can barely pay off the investing and financial expenditure in 1995, however, this is getting worse in 1996, but a turnaround in 1997. This is because the company requests a revolving loan to solve the shortage of cash.
Industry Peer Analysis.
The Clarkson Lumber Company has poor management on inventory.
