Butler Lumber Company Harvard Case Solution & Analysis


The performance of the company is analyzed by calculating several different factors that is Ratio analysis, Common Size Analysis, Liquidity analysis from cash flows and ratios both, and Du Pont analysis.All the calculation has been provided in the given EXHIBIT. The first step in the ratio is to identify the:

Financial Strength:

The quick ratio of the company in the year 1988 is 1.5 as compare to the year 1989 having 1.2 quick ratios and the ratio of in 1989 and 1990 is equal to 1.2. The first quarter of 1991 shows further deterioration of the quick ratio to 0.9. The quick ratio identifies the situation of the company with respect to the payment of its liabilities against the cash which quickly convertible which means the inventory needs to be excluded from that. The quick ratio shows a downward position the industrial benchmark for this ratio is 1. So, in the year 1988 to 1990 Butler Lumber is meeting the standards for industry but adverse results in the 1st qtr of 1991.The current ratio is also in a downward trend, declining from 1.8 in 1988 to 1.4 in the 1st quarter of 1991. This describes the situation that company will be short of cash in the coming years if the problem remains unsolved.

The debt to total equity ratio is currently quite low 11% in 1988 and further declined to 4% in 1st quarter of 1991. Company is more relying on equity which is also not positive because it will increase their risk due to increase in cost of capital. The optimal structure should include at least 40% debt. The interest cover            is also lowering down from 3.8 to 2.1 in the 1st quarter of 1991. This means that despite of low debts its capability to pay the interest is in declining phase which means their profits are in declining phase.

Management Effectiveness:

The management effectiveness has been evaluated by using the return on asset and equity formula. The analysis of these figures shows that management is looking competent and is able to manage the company. The return on asset and equity both are inclining. The return on asset has been inclined from 8% in 1988 to 9%, while the return on equity is moved from 11% to 13%.

The above results doesn’t include their performance of 1st quarter of 1991 as it is still in progress so evaluating these figure in terms of return might not be suitable.


The Gross Margin and operating of the company is looking stable that is good point for the company in terms of required rate of return from the shareholder’s perspective. However, steps need to be taken in order further grow their revenue as they heavily relying on the equity currently, then it may be possible shareholder’s will ask for the greater returns in the future. The operating margin is 3% in all 3 years and also in 1st quarter of 1991 and gross profit margin around 28% in all 3 years. The only concern they should have is to increase the net profit percentage which is quite too low (3%) and this means their growth in sales as compare to the operational cost is lower.


The efficiency ratios for the 3 years showing acceptable results except inventory turnover which is due the storing of excess inventory or either the demand of there is currently limited. The receivable turnover is increasing but the increase of payable turnover is greater than the receivable turnover which is a positive point as the company is delaying his payments more than the receipts of sales. The increase in both the turnover is also not very much positive. This must be stable so that both customers and vendors make satisfactory comments towards company’s performance. The industry average for the receivable turnover is net 30 days and 45 days for payable turnover. As per these figures both efficiency ratios shows negative results. Receivable turnover is in between 35 to 40 days while Payable turnover is in between 45 to 50 days.Buttler Lumber Company Case Solution

Overall Performance:

The overall performance of Butler Lumber with respect to stability and growth is not very much effective as the company is currently heavily relying on equity which has increased the overall risk and put pressure on the management which may result in the creative accounting by the management of the company. The net profit margin is also too low which has restricted their growth. The efficiency of inventory management is also very inefficient. Despite of their net credit 30 terms for sales the receivable turn shows greater value than this. The position of the regarding the current aspect is normal but from the future perspective, the management needs to be more efficient to provide company with sufficient growth opportunities..............................

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