Ryan Boot Co.

Case Study

Case Study

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"#%. 4urt ermore* Ryan Boots as a lo'er re&ei!a%les turno!er ' i& means t at Ryan Boots 'ill re/uire in&reased s ort5term funds to finan&e t eir re&ei!a%les and t eir &as (osition 'ill %e strained.16% 8. $ eir &urrent ratio is a%o!e t e industry a!erage* indi&ating t at Ryan Boots olds more &urrent assets or li/uid assets in relation to t eir s ort term lia%ilities indi&ating a stronger s ort .8610086 1.#% in relation to 2#. Return on .05 Interest *o$erag e ".75% Return on Assets 3.35 In$entory 'urno$er 7 6. In addition* R+.3333333 4.90% Return on !uity 10.45 +ui#.6" Profit Margin for Ryan Boots of 4. Ratio Ryan Boots Industry Profit Margin 4.3#% of t e industry.1666667 1.8 5." *urrent Ratio 1./uity for Ryan Boots is ig er t an t e industry a!erage %ut t is is most li0ely attri%uta%le to t eir ig er le!eraged (osition 'it a de%t to assets ratio of 14.18% is less t an t e industry a!erage of 4.5 (i)ed Assets 'urno$er 1.'ota& Assets 0. $ is is eit er %e&ause t ey are sour&ing t eir materials at a ig er &ost t an t e industry a!erage or t ey & arging a lo'er (ri&e to effe&ti!ely &om(ete.645756 "5.18% 4.60% 6. )ltimately* Ryan Boots is generating less in&ome t an t e industry (er unit sold."0% Re#ei$a%&es 'urno$er ".1) a.501818 1. for Ryan Boots is also less t an t e industry a!erage* ' i& indi&ates ot er firms in t e industry are utili-ing t eir assets more effi&iently to generate in&ome.85 'ota& Asset 'urno$er 0. $ eir in!entory turno!er is %etter t an t e industry a!erage* meaning t at t ey are sto&0ing in!entory more effi&iently t an ot er firms in t e industry ' i& 'ill %enefit t eir &as (osition.774545 1.35 (i)ed */arge *o$erag e 1.1 -e%t. Ratio 0.to.3333333 4.

$ is &an %e done %y eit er redu&ing &redit sales* or more effi&iently enfor&ing t e &olle&tion (oli&y. $ is s ould %e done 'it &aution o'e!er if t e &redit (oli&y of t e &om(any ser!es as a &om(etiti!e ad!antage and it is li0ely t at it is gi!en t e large de!iation from t e industry a!erage. )ltimately t e firm 'ill a!e to in&rease t eir sales* ' ile managing t eir assets and (arti&ularly t eir fi7ed assets to a& ie!e ig er e&onomies of s&ale to im(ro!e t eir return on assets* ' ile at t e same time eit er maintaining or in&reasing &urrent (rofit margins to furt er in&rease t eir interest and fi7ed & arge &o!erage ratios.term li/uidity outloo0. $ is &an also mean t at Ryan Boots as a more le!eraged (osition or is generating less in&ome t an &om(etitors. $ e same a((lies for t eir fi7ed & arge &o!erage* ' i& is lo'er t an t e industry a!erage* meaning t ey 'ill a!e more diffi&ulty &o!ering t eir fi7ed &osts and most li0ely t at t eir in&ome is less in relation to t eir &om(etitors.gain t at mig t not %e (ossi%le if a lo'er (ri&e is a &om(etiti!e ad!antage or t e firm does not a!e enoug %uyer (o'er. $ eir 6ui&0 Ratio o'e!er is %elo' t e industry a!erage im(lying t at alt oug Ryan Boots is sto&0ing in!entory more effi&iently refle&ted in t eir in!entory turno!er* t ey are also olding larger amounts in relation to t eir &urrent assets. . $o a&&urately &omment on ' i& dire&tion t e firm s ould ta0e more information a%out t e mar0et and industry is ne&essary. Profit margin &an also %e in&reased* %y in&reasing (ri&e or more effe&ti!ely negotiating materials e7(enses. %. $ e o!erall %rea0 e!en (oint9s) 'ill %e t e follo'ing: . $o im(ro!e t e &om(any8s (erforman&e* firstly I 'ould suggest im(ro!ing t e re&ei!a%les turno!er. $ eir interest &o!erage is also less t an t e industry a!erage* indi&ating t at Ryan Boots 'ill a!e more diffi&ulty in meeting t eir de%t ser!i&e o%ligations in relation to t e industry a!erage.

D+? @ . =o'* to &al&ulate t e &as %rea0 e!en (oint 'e 'ill need to e7tra&t non5&as e7(enses from fi7ed &osts and add additional &as o%ligations not (resent on t e in&ome statement. • $ e %rea0 e!en (oint in units &annot %e &al&ulated gi!en t at 'e are not (ro!ided 'it t e (ri&e (er unit. :it interest e7(ense &al&ulated as a fi7ed e7(ense: .not &al&ulating interest t e o!erall %rea0 e!en (oint 'ill re/uire <#*2#3*333 in generated re!enue.&al&ulating t e o!erall %rea0 e!en (oint 'it interest as a fi7ed &ost* Ryan Boots 'ill re/uire <#*8"#*333 in generated re!enue.:it out interest e7(ense &al&ulated: . $ erefore* fi7ed &osts of <2*133*333 'ill %e su%tra&ted %y a <#33*333 de(re&iation e7(ense. :e must also add t e <1#*333 in sin0ing fund o%ligations and t e <2#3*333 interest e7(ense ' i& 'ill e/ual a total fi7ed &ost of <1*>1#*333.

D+? of 4 indi&ates t at a 1% de&rease in unit !olume sold 'ill de&rease o(erating in&ome %y 4%. $ e /ui&0 ratio indi&ates t at if t e in!entory is not li/uid and &annot %e sold t e %an0 mig t not %e a%le to re&o!er t eir outstanding loan to Ryan Boots in t e &ase of finan&ial distress. In t is &ase it is im(ortant to also e7amine t e degree of o(erating le!erage and &om%ined le!erage to assess t e firm8s sus&e(ti%ility to ad!erse mar0et &onditions. Currently* Ryan Boots is generating re!enue a%o!e t e re/uired re!enue to %rea0 e!en on an o!erall %asis and on a &as %rea0 e!en %asis. :it t e information a!aila%le I 'ould suggest t at t e &om(any s ould %e eligi%le for a loan al%eit not large gi!en t eir already ig 14. .D4? @ DC? @ &.2% a%o!e t e &as %rea0 e!en (oint* it seems li0ely t at in t e s ort term t e firm 'ill %e a%le to meet its de%t ser!i&e o%ligations in t e fa&e of ad!erse mar0et &onditions. In assessing t e ris0 asso&iated 'it &om(any 'e 'ill 'ant to furt er e7amine t e &urrent and /ui&0 ratio.#% de%t to assets ratio. Ai!en t at t eir &urrent re!enue of "*333*333 is 41. $ is of &ourse is su%Be&t to t e !olatility of t e mar0et ' i& s ould %e e7amined %y t e loan offi&er. d.# indi&ates t at in t e &ase of finan&ial distress t e firm 'ill %e a%le to li/uidate its &urrent assets and %e a%le to (ay off t eir &urrent lia%ilities* assuming t at t e in!entory is suffi&iently li/uid. If &urrent &onditions remain &onstant* Ryan Boots 'ill generate enoug re!enue to meet fi7ed &osts and interest e7(enses. $ e &urrent ratio of 1. . 4urt ermore* t e firm as outstanding %onds in (rin&i(al !alue of <2*#33*333 ' i& 'ill most li0ely %e senior to any loan gi!en %y t e %an0* ' i& in t e &ase of un(re&edented finan&ial distress t e &urrent e/uity 'ill not %e suffi&e to &o!er e7&ess loans.

"3% %Re&ations/i1 of 2aria%&e 4ia%i&ities30 a&es 31.14% A##rued )1enses 4".Per#ent of 0a&es A *as/ Mar.57% R=4@ .eta%&e 0e#urities A##ounts Re#ei$a%&e In$entory %Re&ations/i1 of 2aria%&e Assets30a&es 4 0.14% A##rued )1enses "".43% ".14% 33.71% A##ounts Paya%&e 1."9% 59.43% ".86% 14.00% %Re&ations/i1 of 2aria%&e 4ia%i&ities30 a&es 31.14% 33.57% R=4 @ R=4 @ <14#*C31 e. If ratios are %roug t into line 'it t e industry ratios 'e &an &al&ulate ne' num%ers for a&&ounts re&ei!a%le and in!entory.99% 15. Per#ent of 0a&es A *as/ Mar.38% 40.71% A##ounts Paya%&e 1.eta%&e 0e#urities A##ounts Re#ei$a%&e In$entory %Re&ations/i1 of 2aria%&e Assets30a&es 4 0.

f. . C) Suffered a de&reased gro't in sales If Ryan Boots suffered a de&reased gro't in sales* t ey 'ould not need additional 'or0ing &a(ital to finan&e in&reased sales.s su& * re/uired ne' funds 'ill not %e ne&essary 4) 4a&ed an a&&elerated inflation rate If Ryan Boots fa&ed an a&&elerated inflation rate t ey 'ould %e for&ed to & arge a ig er (ri&e* ' i& 'ould dire&tly in&rease t eir sales in dollar !alues. $ is 'ould re/uire a larger amount of re/uired ne' funds to also in&rease gross (ro(erty* (lant and e/ui(ment. ?i0e'ise t e need for 'or0ing &a(ital 'ill also in&rease ' i& ultimately 'ill in&rease t e re/uired ne' funds.R=4@ 5<141*232 • :it t e ne' in(uts and assuming a t'enty (er&ent in&rease in sales* re/uired ne' funds 'ill not %e ne&essary. 1) :ere at full &a(a&ity 5 If Ryan Boots 'as at full &a(a&ity* t ey 'ould not %e a%le to a%sor% an in&rease in sales 'it out an in&rease in fi7ed assets. 2) Raised t e di!idend (ayout ratio 5 If Ryan Boots in&reased t e di!idend (ayout ratio* fe'er funds 'ould %e dire&ted to'ards retained earnings ' i& 'ould mean t at t e re/uired ne' funds 'ould in&rease if indeed Ryan Boots reali-ed a 23% in&rease in sales. .

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