Investment Analysis

Semester 1 – 2022-2023
Practice Assignment

You work at a bank as account manager corporate banking. You have a number of clients
(corporations) to which your bank provides services, amongst others, providing credit. The
credit risk department of your bank has asked you to prepare a financial analysis for one
particular company, Paulus Corporation.

The main objective of the analysis is to assess how well the company will be able to service its
interesting-bearing debt, a EUR 200 million bullet loan that your bank provided. The loan will
need to be repaid in full on 31 December 2023; at that time, the bank will decide on whether it
wants to extend a new loan, or not. The interest rate that the bank charges for the current loan
is 6% per year. There is no other interest-bearing debt outstanding.

You will execute the financial (ratio) analysis in a standardized Excel-sheet. For 2019 and 2020,
you have gathered the following actual information about the income statement:
• Sales revenues in 2019 amounted to EUR 350 million. In 2020, Paulus realized sales
growth of +4%.
• The gross profit margin amounted to 60.0% in 2019, and 57.0% in 2020.
• Selling, general & administrative expenses amounted to EUR 80 million in 2019 and
EUR 84 million in 2020.
• Depreciation expenses in 2019 amounted to EUR 25 million in 2019 and EUR 30 million
in 2020. There was no amortization.
• There was neither other income, nor were there other expenses in 2019 or 2020.
• The interest expenses correspond with the interest on the loan to your bank. Paulus
receives 0% interest on any cash it holds.
• The company faces a corporate tax rate of 25%.
• Paulus paid a dividend of EUR 1.00 per common share in 2020. The number of common
shares outstanding amounted to 4,110,000.

You also compiled relevant information about the balance sheet:

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 • Per 31 December 2019, Paulus had (net) property, plant, and equipment of EUR 250
million. This amount grew to EUR 300 million by the end of 2020. There were no other
non-current (=fixed) assets.
• Cash & equivalents amounted to EUR 5 million per end of 2019, as well as per end of
2020.
• Accounts receivable amounted to EUR 24 million per end of 2019, and EUR 30 million
per end of 2020.
• Inventories amounted to EUR 40 million per end of 2019, and EUR 43 million per end of
2020.
• There were no other current assets.
• Accounts payable amounted to EUR 8 million in 2019, and EUR 10 million in 2020.
• There were no other current liabilities.

a. Prepare the income statement and balance sheet for 2019 and 2020, in the standardized
Excel-sheet available. Also complete the statement of cash flow for 2020. Enter all
amounts in EUR 1,000, e.g. EUR 24 million should be entered as 24000. Expenses
should be included as negative numbers, so SG&A expenses of EUR 80 million should
be entered as -80000. The number of shares outstanding should also be entered in
1,000 (so 4110).

Together with the research department of the bank, you have looked into the outlook for the
company’s industry (robotics). There are a couple of industry threats, mainly depressed demand
due to new COVID-19 lock downs, higher expense levels due to inflationary pressures, and
potential payment issues with larger customers, especially in the automobile industry.

Based on the outlook, you have made the following forecasts for Paulus Corporation, your most-
likely scenario. The information about depreciation expenses and investments is coming directly
from the company management team.

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 2021 2022 2023
Sales growth (year-on-year) -5% -15% +5%
Cost of goods sold as % of sales -45% -50% -46%
Growth in SG&A expenses +5% +5% +5%
Depreciation expenses (in EUR million) 30 33 33
Investments property, plant & equipment (in EUR million) 60 33 33
Tax rate 25% 25% 25%
Average collection period 35 days 50 days 28 days
Inventory turnover 3.0 2.0 2.8
Accounts payable period 30 30 30

Paulus has indicated that it will not pay out dividends in the coming three years.

b. Prepare the income statements and balance sheets for 2021, 2022, and 2023.

Your bank has set the following three loan covenants in the loan agreement (these are
conditions that Paulus should meet under all conditions at the end of the fiscal year):

Debt ratio Remain below 75%

Times-interest-earned Remain above 4.0
Quick ratio Remain above 2.0

c. Analyse whether Paulus will be able to meet its loan covenants at the end of the coming
three years, based on your forecasts, or not.

d. Indicate whether there are any other issues with the financial position of the company
that will emerge in the coming three years, based on your forecasts (HINT: take a close
look at the balance sheets).

Soon, you will have a meeting with Paulus’ management team to discuss its financial situation.
In preparation of this meeting, you are compiling a list of possible actions Paulus could take.

e. Provide some actions that the management team of Paulus could take to avoid potential
financial issues, a.o related to the loan it received from your bank.

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