Alliance Concrete Essay Example

EBITDA and wants to assess how the recent slowdown in the real estate market has affected the company. The sales manager's research indicates that approximately 2,200,000 yards of cement will be sold.

We included a projected increase of 7% in the average price per yard and a 10% increase in the average cost per yard in our financial model. These increases were confidently anticipated by the sales manager, and as a result, we assumed that revenue would rise by 12.90%. To predict the SG&A expense, we calculated the average of the SG&A margin (SG&A/Sales) for the past four years. We also included the SG&A expense from 2004 in this average, despite it being an anomaly, to account for any potential trends towards higher SG&A costs.

The process of determining interest expense for Alliance Concrete was easy because they pay 8.5% on their debt. The tax rate was calculated using the company's average rate from the past four years, which was 34.81%. By examining the balance sheet, we can infer that the firm's cash position will affect future sales growth. In reality, cash has typically increased at a faster rate than revenue, except in 2004.

Over a four-year period, the average values for days receivables, days inventory, and days payable were used to determine the amounts for accounts receivable, inventory, and accounts payable. The plant and equipment account witnessed a $16 million increase from capital spending but also suffered a $7.5 million decrease due to depreciation. An assumption was made regarding owners' equity. According to our projections, dividends of $3,000,000 would be paid out from the estimated net income of $9,904,000. This results

in $6,904,000 that can be added back into owners' equity.

Finally, we adjusted the long-term debt until the total assets matched the total liabilities and owners’ equity. When we analyze the finances, the sales growth of 12.9% may seem impressive initially. However, it is actually lower than the revenue growth in 2005 and falls 5 basis points below the growth rate of the past three years. The entire industry is facing challenges in terms of costs due to the rising global cement expenses. To quantify this, Alliance is anticipated to experience a decrease in gross margin (representative of cost of goods sold and sales) by around 218 basis points.

Upon analyzing the income statement as a whole, it becomes evident that a decrease in gross margins will inevitably result in a decline in net margin. Alliance is projected to experience a 173 basis points drop in their net margin, which would be the lowest point in the company's four-year history at 4.72%. This comprehensive assessment of margins raises concerns due to Alliance facing a 10% increase in costs while being able to raise prices by only 7%. As a result, they will encounter a 3% growth in expenses that they cannot cover, ultimately having a negative impact on their bottom line. Given this situation, it is crucial to undertake an extensive analysis.

To effectively leverage their balance sheet, Alliance needs to demonstrate financial stability to the bank. The bank is willing to lend up to three times the previous year's EBITDA, which Alliance should highlight. Currently, as of 2005, the debt to EBITDA ratio stands at 2.8. However, projections indicate that this

ratio could decrease significantly to 2.3 in 2006. By increasing it to 3.0, Alliance has the potential to increase their total debt by an additional 30% and reach a long-term debt amount of $90,999,000, providing enough capital for financing their anticipated CapEx for FY'06.

The $16M CapEx is necessary for Alliance to avoid unexpected costs from machinery breakdowns and ensure smooth operations. Their current finances reflect a healthy balance sheet, with a profit margin of 6.45% in 2005. According to our forecast, this margin remains strong at 4.72%. In 2005, Alliance's ROA was 8.92% and ROE was 26.04%, while our forecast for 2006 shows a decrease to 6.76% and 18.71% respectively. The cash coverage ratio, which indicates how many times the company can cover their interest, remains relatively consistent with FY'05 at 5.51 and is forecasted at 4.83.

In this case, Alliance will not struggle financially to fulfill their obligations. Regarding liquidity ratios, Alliance's current ratio decreases by .02 from 2005 to 2006 (1.70), the forecasted quick ratio is 1.46, and the cash ratio remains unchanged at .20. All these ratios indicate the company's ability to convert short-term assets into cash. Conversely, solvency ratios remain consistent in 2006 with a total debt ratio of .64 (.02 decrease YoY) and an equity multiple of 2.32, which relates to the overall health of Alliance's Balance Sheet.

To conclude, Alliance Concrete's ratios and financials are generally steady and do not reach concerning levels. They have enough financial stability to move forward with leveraging their balance sheet for necessary purposes and maintaining their business. Another slight concern for Alliance is meeting dividend payments. However, if they

increase their debt by 30%, they would have sufficient funds to cover both capital expenditures and dividends without straining their relationship with the bank.

All the liquidity ratios support our assumptions, and our forecast for 2006 demonstrates a sufficiently healthy balance sheet. In conclusion, while Alliance Concrete may initially seem to be under financial stress, they possess the ability to increase their leverage to meet business needs. However, in order for the company to thrive and achieve profitable growth in the long run, enhancements are necessary across all aspects of the firm.

To reform the company, our focus should be on maintaining liquidity while also increasing profitability by improving gross margins and net income margins. It is important to consider that our projections are conservative due to higher SG costs. This provides us with flexibility in terms of net income. Investors should be concerned about the current need for external financing and exercise caution if Alliance fails to secure bank loans, as it will likely lead to a dividend cut.