Evaluate the Performance of Butler Lumber Company

Evaluate the performance of Butler Lumber Company.

In 1991, Butler Lumber Company had problems about a shortage of cash and increases its borrowing. The Suburban National Bank offered maximum loan is $250,000. Otherwise, the company can obtain loan $465,000 from Northrop National Bank.

What is the key issue, if any, facing the business of Butler Lumber Company?

1. Butler Lumber Company needs addition money to expand its business.

2. Butler Lumber Company needs improve their cash flexibility.

3. One alarming fact about his business is the lack of a sales staff, yet the revenue has been able to grow at a fast pace; 18% in 1989, 34% in 1990, 19% in 1991.

Scenario A: BLC does not opt for additional debt financing: Assuming BLC achieves sales of $ 3.6 Million, the projected income statement for December 31, 1991 shows Net Income of $58,000 and the projected Balance Sheet shows $ 69,000 available after meeting short term requirements for the year. Therefore it is a profitable business even without additional funding.

Scenario B: BLC opts for additional debt financing: BLC will have more liquidity and can prepare for anticipated expansion. Debt consolidation is possible. Higher level of ownership can be maintained and BLC will get a lower interest rate. The risk is that the company will become highly leveraged and may fall into a debt trap.

After evaluating the pros and cons, Scenario B is recommended as Mr. Butler needs a larger credit line of $378000 to expand and consolidate. From Mr. Dodge's point of view, the loan should be approved based on anticipated sales, profitability and financial projections but must be backed by collateral and a check on Inventory turnover and Days Sales Outstanding must be applicable.

Would you recommend that the Bank give Butler Lumber Company further funding.

Ratio Analysis

Current ratio Current assets *current liabilities 1.45

Quick ratio (cash receivables) *current liabilities 0.67

Current inventory turnover Cost of goods sold average inventory 5.24

Return on assets(ROA) EBIT average total assets 9.22%

Return on equity(ROE) Net income *stockholders' equity 12.64%

Operating profit margin EBIT sales 3.19%

Net profit margin Earnings after taxes *sales 1.63%

Average inventory period Inventory*365days-CGS 78.42

The margins are not great for this industry, and BLC is no exception. As a banker, I would not grant BLC a LOC for $465,000. This is too much for a company this