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Report, 2007

Financial analysis of the U.S based forest industry

Lönnstedt, Lars


This report discusses determinants of profitability expressed as rate of return among U.S. based forest products companies. Rate of return is primarily measured as operating income related to total value of assets on the books. Return on total assets has been divided into profit margin and asset utilization rate. The hypothesis is that return on total assets can be explained by mill size (economies of scale), ownership or control of timberlands (backward vertical integration) and financial situation (solidity). The dataset consists of the 16 largest forest products companies listed in PPI’s International Fact & Price Book 2002. Data are collected for the period 1989-2003. The average return on capital for the studied companies is 6.2 %. The tendency is decreasing profitability. Labor productivity has increased quite significantly, from about 320 to 480 kg/employee and year while solidity has decreased from 44 to 30 %. A statistical analysis indicates that the best model fit is found when asset utilization rate is used as the dependent variable. In a two explanatory variable model solidity gives 11 significant relationships, all positive, while the contribution of other variables is weak. In a one explanatory variable model, employment besides solidity gives the greatest number of significant relationships, eight of them negative. Significant and negative relationships are also found for seven to eight companies for paper and paperboard production, respectively, and number of paper, paperboard and pulp mills. Owned and controlled timberland related to total production is significantly related to the asset utilization rate for eight companies, half of them positive. Thus, one of the hypotheses has some support, the one concerning the positive effect of solidity on profitability. One possible explanation is that investments and their financing are a most crucial issue for the forest products companies. However, it seems as though the main explanations for return on total assets must be found from other variables than the ones included in this study, perhaps “softer” ones, such as leadership

Published in

Rapport (SLU, Institutionen för skogens produkter)
2007, number: 2
Publisher: SLU/Skogens produkter

    SLU Authors

    • Lönnstedt, Lars

      • Department of Forest Products, Swedish University of Agricultural Sciences

    UKÄ Subject classification

    Forest Science

    Permanent link to this page (URI)