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Financial Management – 514
Clarkson Lumber Case Study – 1

Clarkson Lumber, founded in 1981 as a partnership, is a rapidly growing business. The company has relatively low operating expenses and is a fairly profitable outfit. At first look, Clarkson appears to be a well-managed, growing, profitable company. When we dig a little deeper, issues relating to liquidity and financing arise and bring into question the ability for Clarkson to sustain growth.

In terms of profitability, Clarkson is fairly consistent over the years. Please see below table for calculations:

| 1993 | 1994 | 1995 | Q1 1996 | Gross Margin | 25% | 24% | 24% | 25% | Operating Margin | 3% | 4% | 3% | 2% | Net Profit Margin | 2% | 2% | 2% | 0% |

The gross margin indicates that Clarkson is selling its products for more than the direct costs of making the product. The consistent gross margin shows that Clarkson most likely is able to maintain the cost of its inventory through long term contracts. Clarkson is maintaining a consistent operating margin, and the company’s operating expenses average 21% in sales 1993-1995 with a slight increase to 22.9% in Q1 1996. Other than Q1 1996, Clarkson’s operating expenses as a percentage of sales are in line with other high-profit lumber outlets. Regarding net profit margin, Clarkson is at 2% in 1993-1995, with a decrease to 0% in Q1 1996. The reason for a low net profit margin and lower operating margin in Q1 1996 is due seasonality. A large percentage of sales are made in Q2 and Q3, and there is less sales revenue in Q1 to cover overhead.

By performing a liquidity analysis on Clarkson Lumber, we find that the company’s current and quick ratios over the years are as follows:

Year | 1993 | 1994 | 1995 | Q1 1996 | Current Ratio | 2.49 | 1.58 | 1.15 | 1.16 | Quick Ratio | 1.27 | 0.82 | 0.61 | 0.59 |

The relatively low

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