FIN 571 Week 1 Financial Analysis and Planning Example

Can Cascade Ridge Grow 15 Percent Without New Owners? Ratio Analysis, a Percent-of-Sales Forecast and the Additional Funds a Craft Beverage Company Would Need

[Student Name]

University of Phoenix

FIN/571: Corporate Finance

Week 1 Assignment

[Instructor Name]

[Date]

Cascade Ridge Beverage and all figures are composites written for a model paper; methods and research findings come from the sources listed.

Cascade Ridge Beverage, a composite company in Bend, Oregon, began as a craft brewery and now sells beer, hard tea and a growing line of non-alcoholic craft beers through distributors in nine western states. Revenue last year was $180 million and net income about $11 million. Beer volume has been flat for three years as drinking habits shift, while non-alcoholic and hard tea sales grew more than 30 percent. Management wants to grow revenue 15 percent next year, to about $207 million, mostly from those lines. The founding family owns 80 percent of the shares and does not want to sell more. The family's question was simple: could the company grow that fast with the money it generates and borrows, or would growth require new owners? This paper answers with ratio analysis and a financial plan.

Profitability

Gross margin was 40 percent and operating margin 10 percent, on operating income of $18 million. After $3.2 million of interest and a 26 percent tax rate, net income was about $10.95 million, a net margin of 6.1 percent. Return on assets was about 7.3 percent and return on equity about 13.5 percent. Craft beverage peers of similar size reported operating margins of 8 to 12 percent, so Cascade Ridge sits in the middle. By line, non-alcoholic products earn the highest gross margin, about 46 percent, because they sell at prices close to craft beer without the federal excise tax, while beer margins have slipped to 37 percent with discounting.

Efficiency

Total asset turnover was 1.2 times, about average for brewers, who need heavy equipment. Inventory, $22 million of ingredients, packaging and finished goods, turned about five times a year on cost of goods sold. Receivables of $14 million represent about 28 days of sales; many states' alcohol laws limit how much credit brewers may extend to distributors, which keeps collection periods short.

Liquidity

Current assets of about $42 million against current liabilities of about $27 million give a current ratio near 1.6. Cash of $6 million covers about two weeks of operating expenses, thin for a seasonal business whose summer production requires building inventory in spring.

Solvency

Debt of $48 million against equity of $81 million gives a debt-to-equity ratio near 0.6. Operating income covers interest about 5.6 times. The company's bank requires coverage above 3 times and total debt below 3 times EBITDA, its operating earnings before interest, taxes and noncash charges, which at about $27 million of EBITDA gives room to borrow roughly $30 million more before reaching the limit.

What the Ratios Say

Cascade Ridge is financially sound but changing. Its liquidity and debt are moderate, giving room to borrow, but returns in the original beer business are falling while newer lines earn more. Growth therefore makes strategic sense, but it will consume capital. Higgins et al. (2019) describe this as the central planning question for growing firms: whether operations can fund growth or whether outside financing must fill the gap.

The Percent-of-Sales Forecast

Following the standard percent-of-sales approach (Ross et al., 2022), the forecast assumes that operating assets grow in proportion to sales: receivables, inventory and the production equipment that runs near capacity, about $126 million together, or 70 cents per dollar of sales. Spontaneous liabilities, payables and accrued expenses of $21 million, grow too, about 11.7 cents per dollar of sales. Debt and equity do not grow automatically; they are the result the plan solves for. Net margin is held at 6.1 percent and the dividend payout at 30 percent of earnings.

Additional Funds Needed

Additional funds needed equals the required increase in assets, minus the spontaneous increase in liabilities, minus the addition to retained earnings (Brigham & Ehrhardt, 2022). With sales rising by $27 million, assets must rise by 0.70 times $27 million, or about $18.9 million. Payables and accruals supply about $3.2 million. Next year's net income of about $12.6 million, less 30 percent paid out, retains about $8.8 million. The gap is $18.9 million minus $3.2 million minus $8.8 million, about $6.9 million.

Adding the Canning Line

The forecast so far assumes assets grow smoothly. In fact, Cascade Ridge's canning line runs two shifts at full capacity, and the non-alcoholic growth requires a new high-speed line costing about $9 million. That lumpy investment raises the funding need to about $15.9 million.

The DuPont View of Returns

Return on equity of 13.5 percent can be split into three parts: a net margin of 6.1 percent, asset turnover of 1.2 times and an equity multiplier of about 1.85, total assets of $150 million over equity of $81 million. Compared with three years ago, when return on equity was about 16 percent, the decline came almost entirely from margin, as beer discounting deepened, while turnover and financing barely changed. That points the planning effort at margin and product mix rather than at the balance sheet, and it explains why management wants growth concentrated in the higher-margin lines.

Seasonality Inside the Year

An annual forecast hides seasonal swings. Cascade Ridge builds inventory from March to May for summer, when about 40 percent of annual volume ships. Peak working capital in May runs about $8 million above the year-end figure used in the percent-of-sales forecast. The annual funding gap therefore understates the peak borrowing need, which the company's revolving line must cover. A monthly cash budget, prepared alongside the annual plan, will size that line. Without it, the company could meet its annual target and still run short of cash in May, when cans, malt and hops for the summer must be paid for weeks before distributors pay for the beer.

Sensitivity

If net margin improved to 7 percent, retained earnings would rise by about $1.3 million and the gap would fall to about $14.6 million. Cutting the payout to 15 percent would reduce the gap by about $1.9 million. If growth reached only 10 percent, the smooth asset increase would shrink by about $6 million, though the canning line would still be needed. Management controls the payout directly; margin and growth depend partly on the market.

Can the Company Avoid New Owners?

A gap of about $16 million is within the roughly $30 million of borrowing capacity the bank's covenants allow. Borrowing the full amount would raise debt to about $64 million and the debt-to-earnings ratio to about 2.2 times, within limits but leaving less room for a bad year. A lower payout, an equipment lease for the canning line or a combination could reduce the borrowing. Week 6 compares those options.

Conclusion

Cascade Ridge's ratios show a sound company whose newer lines outperform its core beer business. Growing 15 percent requires about $16 million of outside funds, mostly because of a new canning line. That gap fits within its borrowing capacity, so growth does not require new owners, but how it is financed will decide how much flexibility remains.

References

Brigham, E. F., & Ehrhardt, M. C. (2022). Financial management: Theory and practice (17th ed.). Cengage.

Higgins, R. C., Koski, J. L., & Mitton, T. (2019). Analysis for financial management (12th ed.). McGraw-Hill Education.

Ross, S. A., Westerfield, R. W., Jaffe, J., & Jordan, B. D. (2022). Corporate finance (13th ed.). McGraw Hill.