Cartwright Lumber Company Harvard Case Solution & Analysis

Cartwright Lumber Company Case Solution

Cartwright Company is less asset intensive, and doesn’t possess the need to have a lot of fixed assets. The major needs of the company are its current assets, i.e., cash and inventory. Neither does the company possess large human capital needs. There are only 12 employees including the owner and his assistant. The owner seems to have tight control over the costs, which lead to increased revenues. Hence, it is believed that the company needs only a few more years to recover from the debts incurred from the purchase of partner’s share, and thus, it shouldn’t borrow such huge amount. He can also avail purchase discounts in 2004 by paying to suppliers in time, which will further increase his net profits.

Financial Analysis:

The Company’s profitability has improved significantly in past three years and its improving returns on assets and growth margins describe that the company’s management is efficient in generating returns from its assets. However, the risk ratios of the firm has deteriorated since 2002, due to the increased reliance on debt finance. There is a large increase in gearing, which has led to a decrease in cash for the company. The management should realize that further increase in gearing can be risky for the company in the long run.

The loan in 2002 was raised to acquire partner’s share capital; however, the debt raised in 2004 is substantial. The current financing need of the company is $232,000 ($465000-233000), which can be covered up from the company’s borrowing from Suburban National Bank. It can be said that this amount will be sufficient to sustain future growth of the company. Hence, additional loan shouldn’t be taken to avoid future financial problems.

The returns on assets and the return on equity of the company emphasize that the company is profitable and lucrative in the long run. Its current cash flow is not healthy, however, the forecast cash flows for 2004 seem to improve and will cope up with the financing needs in future. Hence, although the current financial position is not good, however, if the operations and financial structure is managed effectively, then it is likely to generate sound results in future.

The company’s market position is strong and the management has tight control on its operating policies. However, the major problem with the company arises with its weak funding decisions that have increased the financing problems for the company. It is highly leveraged and the management should avoid further substantial increases in debt financing.

The owner should pursue growth from the current deal with suburban bank, and should avoid raising further debt to avoid cash flow issues in the long run. He can further reduce cash flow difficulties by paying to suppliers in time to avail purchase discounts.............


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