Running head: CARTWRIGHT LUMBER COMPANY 1

Cartwright Lumber Company Paper

Trinh Nguyen

Los Angeles Pacific University

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Why does Mr. Cartwright have to borrow so much money to support this profitable

business?

In order for the Cartwright Lumber Company to sustain its growth rate, they will have to

get additional external funding. Growth in sales nearly doubled from 2001 to 2003, with a

percentage of 18% and 34% in 2002 and 2003, respectively (“Cartwright Lumber Company,”

2004). While sales are growing at a steady rate, the company’s cash is steadily decreasing as the

years pass by 20% and 17%, in 2002 and 2003 (“Cartwright Lumber Company,” 2004). The

financial statements indicate that the accounts receivable has grown at a higher rate than sales,

which suggest that the company cannot support the growing sales only by relying on the assets.

Although financial statements indicated that Cartwright has a positive cash flow and

increasing revenue over the past few years, Cartwright’s borrowings and loans have continued to

increase as well. Cartwright wanted to purchase all of Stark’s stocks or ownership in the

company, which made him pull loans for those purchases. To pay off Stark, Cartwright gave him

a note of $105,000 to be paid off in 2002 (“Cartwright Lumber Company,” 2004). To pay off

that specific note, Cartwright took another loan of $70,000 to be paid in the next 10 years and

that loan also carried an interest rate of 11%. These borrowings reduced Cartwright’s spending

potential, which prevented him from taking any purchase discounts in order to settle the lender’s

credits early. Any cash flow that was generated was invested back into the business, which

would increase the sales volume.

Why does he have an urgent need for funds?

Cartwright had a strong desire to purchase all of Stark’s stocks in the Cartwright Lumber

Company. In order to complete the purchases and make payments to Stark, Cartwright had to

borrow a large amount of money. The retained earnings in the company were insufficient to meet
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the asset demands imposed by sales growth. In this case, borrowing from the banks would act as

a primary source of external funding. Additionally, Cartwright was already short of money after

the interest purchase from Stark.

Explain at least one financial reason or business activity that explains the need for

additional funds. (Refer to Table A above)

In the end of the financial statements for 2003, the trade credit was increased to $132,000

as a measure to keep the bank borrowings in the imposed ceiling of $250,000 (“Cartwright

Lumber Company,” 2004). Borrowing the money would allow him to sustain the business and

grow in the upcoming year. By the first quarter of 2004, the trade credit was increased to an even

larger amount of $157,000.

Is Gross Profit increasing or decreasing from 2001 forward?

Gross profit appears to be increasing from 2001 forward, as it begins at $475,000 then

increases to $576,000 in 2002. In 2003, the gross profit further increased to $744,000.

Is Net Income increasing or decreasing from 2001 forward?

Net income is steadily increasing from 2001 forward. In 2001, the net income starts at

$31,000 and increases to $34,000 in 2002. In 2003, the net income increased to $44,000, which

was the highest amount for the company in these operating statements.

What major factor is affecting the projected Net Income for 2004?

The increases in expenses is a major factor affecting the projected net income for 2004.

Net income is the result of revenue subtracting expenses, and the expenses appear to be almost

equally as large as the revenue for the company. With all the increasing expenses and borrowed

money from banks, the company does not have much funding to sustain its own working capital.
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If you were the bank officer charged with analyzing this data, would you consider

Cartwright Lumber Co. a valuable client, or reject the loan application? Why?

If I were the bank officer, I would reject Cartwright’s loan application because the net

income of the first quarter of 2004 was only $9,000. If that was only one quarter, then I would

conclude that the net income for the full year of 2004 would be approximately $36,000. That

estimation is lower than the net income of 2003, indicating a lower ability to pay back the loan.

The long-term debt was too large for the company, and the current ratio is 1.35. The current ratio

was at a low number, suggesting the company may not have large retained earnings.

After reviewing the Exhibits in the case study and/or the Table above, make one financial

observation for Cartwright Lumber that you can deduce from the information

provided. What piece of advice or caution would you offer Mr. Cartwright?

I would caution Cartwright to reconsider his anticipated expansion and his plans for

additional debt financing. Cartwright is going to face a large financial problem because his debt

to total assets ratio keeps increasing year by year. By the first quarter of 2004, the debt to total

assets ratio increased to 67.4%, which would make it extremely hard for the company to be

financially stable.

Furthermore, the analysis of current and long-term liabilities as proportionate of total

assets reveals that current liabilities are continuously increasing, while long-term liabilities are

decreasing. This means that Cartwright Lumber Company is heavily relying on current liabilities

to finance its fixed and current assets rather than financing its fixed assets through long-term

liabilities.
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References

Cartwright Lumber Company. (2004). Retrieved from Harvard Business School.