I. Key Issues Overview
When Cartwright Lumber Company was originally founded, it was owned by both Mark Cartwright and Henry Stark. However, Cartwright bought out Stark’s interest for $105,000 and became sole owner of the company. To finance this payment, Henry took out a $70,000 loan with an interest rate of 11% secured by land and buildings payable over 10 years at a rate of $7,000 each year.
was located in a suburb of a large city in the Pacific Northwest; its operations were limited to the retail distribution of lumber products in the local area. In 1994, Cartwright Lumber Company was established as a partnership by Mark Cartwright and his brother-in-law Henry Stark. However, in 2001, ...view middle of the document...
The tentative discussions between Northrop Bank and Cartwright Lumber Company had been about a revolving secured 90-day note not to exceed $465,000. Interest would be set on a floating-rate basis, which was about 10.5% under conditions in effect in early 2004.
The problems were, how much should Cartwright borrow, should Northrop Bank approve the loan?
II. Financial Analysis
Based on the company background and situation analysis, we do the historical record for financial analysis, including profitability, assets management, liquidity, working capital and cash flow.
Profitability ratios are functions of both the industry and a company’s position within the industry. The boundaries are set by the operating characteristics of the industry, within these boundaries profitability ratios are determined by a player’s relative position. Gross profit margin should stay constant or increase because cost of goods sold should be a constant percentage of sales or should decrease as the company ’s price increases and/or volume discounts. Gross profit margin was slightly favorable stable at 28%. The horizontal analysis information showed that sales had been averagely increased by 26% from 2001 to 2003.However the operating cost had been averagely increased by 27%.
2. Assets Management
For the assets management, we are looking for receivable turnover, payable turnover, inventory turnover. Turnover ratios measure how many times per year a given resource is consumed. Management’s objective is to stretch out the accounts payable period (low accounts payable turnover) and shorten the periods for accounts receivable and inventory (high accounts receivable and inventory turnover). The average of 2001 to 2003 was 10, 9.2 and 5.1 times respectively. And according to horizontal analysis from 2001 to 2003, the assets and liabilities were keeping increasing.
3. Liquidity & Working Capital
Current ratio measures the firm’s ability to meet short-term obligation. The average of 2001 to 2004 was 1.55. Asset-liability ratio measures the firm’s ability to meet its long-term obligation. The average of 2001 to 2004 was 0.61. Those were within acceptable level.
Besides the liquidity, the working capital was keeping increasing from $ 208 thousand to $ 242 thousand.
4. Cash Flow
Based on the income statement and balance sheet, we can get the cash flow statement for year 2002, 2003 and the first quarter of 2004. From the cash flow, it is obviously see that the main use of fund is for operations, materials purchasing, wages payment, interest payment etc. While the source of fund is from financing, bank loan and trade notes payables.
III. Credit Assessment & Industry Analysis
With understanding of historical financial situation, we still need to know how company’s credit report demonstrates. And for a corporate form of organization, how it plays about the owner of the company’s personal credit.
1. Credit Assessment on...