Clarkson Lumber Review Flashcards
What is the moral?
Profitability does not equal Liquidity
What is the biggest issue and some of his other issues?
His rapid growth is causing him to go bankrupt, it is not sustainable.
How is the Porter’s Analysis and SWOT helping us?
It is helping us understand the risk of the cash flows and the timing of cash flows
What does a Funds flow analysis tell us?
It tells us how a firm spends their cash
What is Clarkson’s Lumber’s biggest opportunity cost?
They need to take advantage of their A/P discounts, but are unable to
What is the liquidity problem?
You need money now, but you know you will have the money later - in this scenario, debt is very reasonable
How do we know if the business strategy is bad?
If the left side of the balance sheet is down
What did Porter’s 5 forces tell us?
Low cost wins this industry
No barrier to entry
Decline EBITDA if new competitor
What did SWOT analysis tell us?
Location gives him competitive advantage
Barriers to entry drives sustainable competitive advantage which drives terminal growth
He has a huge weakness of 73% leverage ratio
Threat at industry level
What are the ways equity can go down?
Equity goes down if you buy back stock
Equity goes down if you don’t make money
What is Notes Payable - Trade?
This means you aren’t paying on time, you sign a note and if you don’t pay on time you will pay interest
What creates Clarkson’s Lumber’s appetite for cash?
Rapid sales growth putting pressure on Assets
Low profit retention (R/E are insufficient)
What are the 8 ways to increase sustainable growth?
1) Cut dividends
2) Increase profit margin
3) Increase asset turnover ratio
4) Increase debt
5) Increase price
6) Cut variable costs
7) Cut fixed costs
8) Cut taxes
He cannot do any of these
What should we know about opportunity cost?
If the borrowing cost is less than the opportunity cost of taking a discount on payables, TAKE THE DISCOUNT
How does Clarkson Lumber back out of the debt?
Negotiate a larger credit line (he can’t do this)
Slow down growth (he can’t do this)
Obtain equity financing (has to get angel investors)
