Case study Wilson Lumber Company
QUESTION 1
WHY HAS WILSON LUMBER BORROWED INCREASING AMOUNTS DESPITE ITS CONSISTENT PROFITABILITY?
Although the company seems to be profitable, it has faced shortage of cash. It happened due to increase in Accounts Receivable as well as Inventories. On the other hand, Accounts Payable does not increase that rapidly and difficulties regarding cash collection become evident. Furthermore, the cash collection cycle becomes larger (59 days in year 2003, while more than 70 in year 2006).
QUESTION 2
HOW HAS MR. WILSON MET THE FINANCING NEEDS OF THE COMPANY DURING THE PERIOD 2003 THROUGH 2005? HAS THE FINANCIAL STRENGTH OF WILSON LUMBER IMPROVED OR DETERIORATED? EVALUATE WILSON LUMBER FINANCIAL HEALTH.
During 2003- 2005 the company borrowed money (long term loan) from bank to finance its operations.
In general profitability ratios are positive, however, could be higher. That might be a signal of cost reduction. On the other hand, the company becomes less liquid and its liquidity ratios keep dropping within all years. Both liquidity rations inform that there is lack of cash in the company. The leverage ratios show that company has increased its long term debt and now company becomes more financed by debt than equity. As the debt grows, the interest rates become larger and thus the interest coverage ratio becomes smaller. The activity ratios point out that the cash collection cycle becomes larger therefore company faces some serious issues regarding cash collection (59 days in 2003 whereas 78 in year 2006).
QUESTION 3
TO ESTIMATE THE SUSTAINABLE GROWTH RATE (SGR) THAT WLC CAN SUSTAIN WITHOUT FURTHER WEAKENING THE BALANCE SHEET ASSUMING:
NO CHANGE IN THE RATIO OF SALES TO TOTAL ASSETS,
NO CHANGE IN THE RATIO OF TOTAL LIABILITIES TO OWNERS ' EQUITY
NO EQUITY ISSUES OR REPURCHASES
A RETURN ON BEGINNING EQUITY OF 20 % ( THE 2005 LEVEL), AND
A CONTINUATION OF THE POLICY OF PAYING NO DIVIDENDS.
2003
2004
2005
2006
Sustainable Rate of Growth
12%
18%
17%
WHY HAS WILSON LUMBER BORROWED INCREASING AMOUNTS DESPITE ITS CONSISTENT PROFITABILITY?
Although the company seems to be profitable, it has faced shortage of cash. It happened due to increase in Accounts Receivable as well as Inventories. On the other hand, Accounts Payable does not increase that rapidly and difficulties regarding cash collection become evident. Furthermore, the cash collection cycle becomes larger (59 days in year 2003, while more than 70 in year 2006).
QUESTION 2
HOW HAS MR. WILSON MET THE FINANCING NEEDS OF THE COMPANY DURING THE PERIOD 2003 THROUGH 2005? HAS THE FINANCIAL STRENGTH OF WILSON LUMBER IMPROVED OR DETERIORATED? EVALUATE WILSON LUMBER FINANCIAL HEALTH.
During 2003- 2005 the company borrowed money (long term loan) from bank to finance its operations.
In general profitability ratios are positive, however, could be higher. That might be a signal of cost reduction. On the other hand, the company becomes less liquid and its liquidity ratios keep dropping within all years. Both liquidity rations inform that there is lack of cash in the company. The leverage ratios show that company has increased its long term debt and now company becomes more financed by debt than equity. As the debt grows, the interest rates become larger and thus the interest coverage ratio becomes smaller. The activity ratios point out that the cash collection cycle becomes larger therefore company faces some serious issues regarding cash collection (59 days in 2003 whereas 78 in year 2006).
QUESTION 3
TO ESTIMATE THE SUSTAINABLE GROWTH RATE (SGR) THAT WLC CAN SUSTAIN WITHOUT FURTHER WEAKENING THE BALANCE SHEET ASSUMING:
NO CHANGE IN THE RATIO OF SALES TO TOTAL ASSETS,
NO CHANGE IN THE RATIO OF TOTAL LIABILITIES TO OWNERS ' EQUITY
NO EQUITY ISSUES OR REPURCHASES
A RETURN ON BEGINNING EQUITY OF 20 % ( THE 2005 LEVEL), AND
A CONTINUATION OF THE POLICY OF PAYING NO DIVIDENDS.
2003
2004
2005
2006
Sustainable Rate of Growth
12%
18%
17%