Lecture3 - clarkson lumber

Isthisisjustduetosalesgrowth

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Unformatted text preview: ing current assets (A/R and Inventory) – Increase in fixed assets – Buyout of Holtz’s equity stake How is it being financed? – Operating CF – Increase in payables – Bank loan – Buyout financing 13 Analysis of Working Capital The increases in A/R and Inventory are major causes of the need for financing. Is this is just due to sales growth? Collection Period (assume all sales on credit) 1993 AR Turnover Collection period 1994 1996* 9.7 8.9 9.3 37.6 41.1 39.5 *using forecasted sales & avg (AR95 , AR96Q1) Q1 AR are low than the annual average because of cyclical sales peak in next quarter. Thus, this understates the CP. The increase in AR is due mostly to sales growth, but also to a longer collection period. 14 Analysis of Working Capital Inventory Period 1993 1994 1995 1996* Inventory Turnover 6.6 6.9 6.7 5.4 Inventory Period 55 53 54 67 *using Q1COGS*4 & avg (Inv.95 , Inv.96Q1) Seems that inventory turnover is falling in 1996, but Seems inventory is high because of cyclical sales peak in next quarter. Thus, the inventory period is overstated in our calculations. calculations. The inventory period stays constant over time. 15 Analysis of Working Capital Payables period 1994 AP Turnover Payables period 1995 1996* 9.5 9.6 8.6 38.3 38.2 42.3 *using Q1COGS*4 & avg (AP95 , AP96Q1) Clarkson is stretching its payables, that is, relying more on trade credit to finance its operations. Borrowing from suppliers, which is more expensive than borrowing from a bank, is typical of firms that are credit constrained. 16 Analysis of Working Capital 1994 1995 1996* Operating Cycle 90 95 107 Cash Cycle 52 56 64 In summary, Clarkson indeed appears to need cash due to rapid sales growth This rapid sales growth causes higher AR and inventory which, together with the firm’s credit constraint that forces it to borrow from suppliers, leads to a longer cash cycle. 17 Productivity of Fixed Assets Net fixed assets / Sales gives you the net fixed assets used per dollar of sales generated. Lower numbers indicate higher productivity of the net property, plant, and equipment. Net property / Sales 1993 8.0% 1994 7.5% 1995 8.6% 1996* 7.0% *based...
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