Terrace Corporation is a machine maker in Interior British Columbia established in 1995. It has grown over time by making high quality machines and providing excellent customer service. The production plant is located in Merritt and is operating near 100% capacity.

Sales are concentrated with 1 large customer, Victoria Vagabonds, under accounts receivable terms of net 50. Raw materials are purchased from a Salmon Arm distributor under terms of net 60 with overdue accounts paying 9% per annum. 

Financing is from various sources one of which is RBC under a 2-year term revolving line of credit of $6 million. 

Security for this financing is pledging inventory and accounts receivable as well as a $3 million personal guarantee by the owner-CEO Charlotte Vavavoom. RBC will lend up to 80% of accounts receivable, 35% of raw materials, 20% of work-in-process and 40% of finished goods inventory. 

The revolving line of credit must have a zero balance for at least 1 month of the year.

Covenants with the loan include maintaining a current ratio of 1.7, cash flow coverage of 1.6 and a long-term debt to total capitalization ratio no more than 55%. 

No dividends are paid and all profits are reinvested in the company for growth. 

RBC is concerned that Terrace is floundering financially speaking and is reviewing its performance over the last 4 years. 

Conduct a thorough financial analysis based on the 5 years of income statements and balance sheets provided as well as industry average benchmarks. Include in your report ratio analysis, common size analysis (horizontal and vertical) for 2017-2021 as well as cash flow statements for 2017-2021 plus an annual DuPont Identity ROE analysis. Your report should include more than two page summary of your analysis.

Note:

1. Cash flow coverage is defined as (EBIT + Depreciation)/Interest)

2.  Cash ratio = Cash/ (Current liabilities)

3. Long-term debt to capitalization ration = LTD/(LTD + Total Equity)

4. ROA = (Net Income)/(Total Assets)

5. Turnover ratios use end-of-period account balances, i.e. no averaging

 

 Terrace Corp. Income Statements in $ for 2017 to 2021

Sales	45046500	78391680	1.1820996E+08	1.7559702E+08	2.1453516E+08
COGS	31303500	55786590	84969180	127696980	159000450
GP	13743000	22605090	33240780	47900040	55534710
S & D	4951020	7351890	11290200	16201050	18003690
R&D	436020	1360920	2296020	4741020	5701350
Admin	1651020	3152250	5851800	10200000	12241560
Amort	1739832	2726652	5640852	8997597	11516370
Operating Profit	4980108	8013378	8161908	7760373	8071740
Interest	672417	1178277	2856924	4959705	6903528
EBT	4307691	6835101	5304984	2800668	1168212
Taxes	1507692	2392287	1856745	974235	408873
Net Income	2799999	4442817	3448239	1826433	759336

 

 Terrace Corp. Balance Sheets in $ for 2017 to 2021

Cash	1202250	2372010	3104070	2470740	2296020
A/R	7378800	13021620	19351020	29851020	34651260
RM Inv	2026020	3310200	5368020	7351020	9721020
WIP Inv	2622960	4321590	5851020	7022040	7468170
F/G Inv	2406480	5022879	7843749	13241259	20255139
CA	15636510	28048299	41517879	59936079	74391609
L,P,E net	16513320	26269020	55036020	88360050	113068680
Intang	735000	997500	1372500	1615920	2095020
T Assets	32884830	55314819	97926399	149912049	189555309
	0	0	0	0	0
A/P	5281020	12029610	19494681	29768988	38656326
CPLTD	1198602	1947564	4556499	7910217	10637178
CL	6479622	13977174	24051180	37679205	49293504
LTD	11986020	19475640	45564978	79102167	106371789
Equity	14419188	21862005	28310244	33130677	33890013
TL & E	32884830	55314819	97926399	149912049	189555309

 

 Benchmark Common Size % Balance Sheet  (assume the same for all years)

Cash    15.45

A/R       9.34

RM Inv  6.38

WIP Inv  2.54

F/G Inv   13.34

CA            47.05

L,P,E net   43.65

Intangle       9.3

T Assets   100

A/P          9.45

CPLTD      5.39

CL            14.84

LTD         33.45

Equity    51.71

TL & E   100

 

Benchmark Common Size Income Statement % (assume the same for all years)

Sales       100

COGS        55

GP             45

S & D       13.45

R&D         1.56

Admin     6.67

Amort      4.77

Operating Profit   18.55

Interest       2.59

EBT               15.96

Taxes           4.79

Net Income   11.17

 

Benchmarks for Financial Ratios (assume the same for all years 2017 to 2021)

Current                    2.7

Cash                         0.21

RM turnover (days)    32

WP turnover (days)     14

FG turnover (days)       60

A/R turnover (days)      45

A/P turnover (days)      55

Cash conversion cycle (days)   90

Fixed Assets turnover     2.7X

Total Asset turnover      1.2X

Long-term debt to total capitalization  35%

Cash flow coverage     2X

Gross profit margin    42%

Operating profit margin    16%

Net profit margin      9%

ROA    7%

ROE    15%