The purpose of this article is to analyze the Butler Lumber Company from a financial perspective. The financial information of the company provided include the financial statements (income statement and balance sheet) and financial ratios. From this analysis, the financial health of the company will be identified and recommendations made.
Between 2008 and 2010, Butler Lumber increased its sales revenue from $1,697 to $2,694; an increase of $997. The change in sales has consequently led to an increase in the cost of goods sold which has increased from $1,222 to $1,950 during the 3-year period. Ising (2014) suggests that the cost of goods sold rose probably due to the fact that an increase in the costs associated with production. Overall, there was an increase in the company’s operating profits.
The company’s operating expenses have been on a constant increase. The increase in the operating expenses is probably due to an increase in the company’s production leading to a rise in costs related to the company’s operations (Chapman et al., 2007). Overall, an increase in net sales contributed to an increase in the net income during the 3-year period.
The balance sheet shows a decreasing trend in Butler Lumber’s cash. In 2008, the amount was $58. However, by the end of 2010, the amount was $41. However, there was a notable increase in the accounts receivable suggesting that the company’s net sales have increased due to the fact that some of the customers are been given more goods on credit (Jackson, 2007). The company’s inventory has also increased. In 2008, the figure stood at $239. In 2010, this had increased to $418. The company could be holding more goods due to increased production. The fixed assets have also augmented. This could suggest that the company equipped itself with more assets to enlarge its production.
There were significant changes in the company’s financial ratios. First, there has been a tremendous decrease in the current and quick ratios suggesting that Butler Lumber has increased its current liabilities more than its current and quick assets.
The debt ratio shows the percentage of Butler Lumber’s assets that are financed with debt. This ratio has increased from 54.55% to 62.7% between 2008 and 2010. This is risky since the company is using more debt to finance its activities (Brigham & Daves, 2014).
Times interested earned shows a company’s capacity to honor its payment of debt. The company’s TIEs are generally low which may discourage investors and financiers from investing in the company since there is a potential risk of default of a payment due to the low TIE score.
The company has high inventory turnovers suggesting that it is not at any risk of overstocking. The days sales outstanding of the company are high. It does not collect the sales sold on credit too quickly. This could encourage more customer since they may enjoy prolonged DSO.
The company’s return on investment has been gradually increasing. This could encourage investors since they expect their investments to reciprocate to profits. However, the return on assets is decreasing. The company has invested in more assets. However, the company is yet to fully ensure that the assets play a role in increasing production.
Brigham, E. F. & Daves, P. R. (2014). Intermediate financial management, 12th edition. Cengage Learning.
Chapman, C. S., Hopwood, A. G., Shields, M. D. (2007). Handbook of management accounting research volume 1. Oxford: Elsevier.
Ising, P. (2014). Earnings accruals and real activities management around initial public offering: Evidence from specific industries. Zurich: Springer Gabler.Jackson, S., Sawyers, R., Jenkins, G. (2007). Managerial accounting: A focus on ethical decision making, 4th edition. Mason, OH: Thomson Higher Education.