Calaveras Vineyard to Produce Wine for the Catholic Church

The following sample essay talks about the Calaveras vineyard for producing wine for the Catholic Church. Read the introduction, body and conclusion of the essay, scroll down.
Calaveras Vineyard was originally established in 1883 to make wine for the Catholic Church. They occupied 220 acres in California out of which 175 acres was occupied by the vineyard. They had now expanded into production of table wines for retailers and restaurants. It had changed three ownerships in the last nine years. The most recent owner was Stout Plc.

which was looking to sell Calaveras and the management of Calaveras was the interested party in this transaction.

The main strategy from 1987 was broadening the company’s position on premium brand category and this is evident from the fact that they were now concentrating on wines in the premium and super-premium category. The five C? s analyses is an important approach to evaluate the creditworthiness of a potential client. The five metrics that will be analyzed are character, capacity, capital, conditions, and collateral.

Character will translate the quality of the management team and major owners and how these major players behave related to business.

Related to Lynna Martinez, she has a high level of education and is graduated from important universities in France and USA. She has done researchers in the field and has experiences as a professional in the industry, being Vice president of Calaveras Vineyard since 1987. The other partner – Peter Newsome, has a degree in Business Administration and has experience in the field in different areas of this industry, such as operating and purchasing.

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It is possible to say that this metric is maybe one the most important for the future of this business since both of them have strong experience in the field.

Related to the capacity analysis, it is unclear, based on historical data, the ability of the company in handle a high debt level, since there no information about Calaveras Vineyards – Team No. 1 18-Feb-2013 debt from the balance sheet. However, the company has a significant position as current assets what provide quick liquidity for the business as well as a strong free cash flow in both considered scenarios to repay the loan, even though the free cash flow in 1994 is negative. The apital metrics will measure whether the company has enough capital, in this point also matter the commitment of the owners with the business. In the management leveraged buyout, the new owners will have $ 1 million invested and thus they would have invested 25% of the total demanded fund. It seems that the new owners are putting an great effort on this business since they are buying a company that they have experience in and they believe it can do better than what the previous owners were doing.

The economic conditions for the wine business seems to be in a good moment, even though the alcoholic market has been stagnated, the wine market has grown by 7. 4%, new researches about the benefits of wine has driven the demand up and thus the market is being benefited. Based on the Pro Forma Historical Financial Statements, it seems that the management team is able to control the expenses and cost of goods sold as the sales increase and decrease. It is possible to see it using the decreasing trend of the COGS related to sales and the SG&A related to sales that has been the same (14. 9%) for the last 4 years. The company has as collateral, the Accounts Receivables and fixed assets. In 1993 the company had $316,782 as receivables, $2,332,241 as inventories and $4,487,193 as gross fixed assets. In case of liquidation, the Receivables may be sold at 85% of the face value, or $292,264; Inventory can be sold at 75% of its face value or $1,749,180. The fixed cost can be sold by 40% of the book value that is $1,794,877. This liquidation would provide a total of $3,836,321 which is more than Calaveras Vineyards – Team No. 1 8-Feb-2013 the total loan provided in 1994 ($3,122,000). It provides a good standard for the potential creditor of this company. Moody’s SGL framework can also be used to assess the creditworthiness of Calaveras Vineyards. The rating system gives a score ranging from SGL-1 to SGL-4, where one represents companies with very good liquidity and four represents companies with weak liquidity. There are several characteristics that are evaluated in rating a company using this framework. The first point is the capacity for financing capital expenditures and net working capital internally.

Calaveras has an expected negative free cash flow in 1994 based on Anne Clemen’s projection (Exhibit 3), so it will not be able to fund internally. However, the company still has the flexibility of drawing money from its revolving credit line since the borrowing base has sufficient amount. Exhibit 3 also shows that the negative cash flow is due to a significant addition to net working capital. The addition is larger than average because the company is increasing its sales to the same level of 1992. The company is projected to have positive free cash flows starting in 1995 and will be able to finance internally.

The EBIT/(interest and principal) ratio is moderate in 1994 but projected to increase throughout the years (Exhibit 3) and has an average of two. The second characteristic that needs to be analyzed is the flexibility of the company in generating cash from selling its assets in times of distress. Anne Clemen expected that Calaveras’ accounts receivable would able to generate 80% of book value and inventory for 85% of book value, while land, plant and equipment would only generate 40%. However, these assets are crucial to the operations of Calaveras and cannot be sold.

Thus, the company has no flexibility in generating additional cash flow. Additionally, the assets mentioned before are used as collateral for both the term loan and the revolving credit. This relates to the final characteristic that is the extent Calaveras Vineyards – Team No. 1 18-Feb-2013 in which the company’s assets are encumbered. Calaveras is expected to secure its term loan through land, plant and equipment, and its revolver’s borrowing base is equal to 85% of receivables and 75% of inventories. In other words, most of Calaveras’ assets are encumbered and this limits the financial flexibility.

After analyzing Calaveras’ through the SGL framework, we believed that the company should receive a score of SGL-3. The increase in the size of the wine market is an opportunity for Calaveras to increase their market share especially in the premium and super-premium category where the company has secure brand position and stable relationships with the distributors. It is heavily dependant on two dealers who account for 50% of their sales. It might bode well for them to increase their dealership base. Financial ratio analysis: To better understand Calaveras Vineyards’ financial ondition, we analyzed those financial ratios that Anne prepared. EBIT coverage ratio and current ratio in 1994 were already larger than 1 and was increasing from 1994 to 1998, indicating this company was profitable enough to pay off its interest expense and short-term obligation. Although current ratio was not so good compared with comparable companies, it was improving through years. The debt ratio was less than 1 and reduced quickly from 1994 to 1998, which was a good signal to investor and creditors that the risk of this company was decreasing.

In addition, its decreasing assets/equity ratio indicated the quick increase of equity, which was the result of quick increase of net income. The return on sales and return on assets were much higher than the comparable companies and were increasing from 1994 to 1998, indicating this Calaveras Vineyards – Team No. 1 18-Feb-2013 company had good profitability in the industry. Its increasing sales/assets ratio showed an improvement of its ability to generate sales revenue from each dollar of asset, indicating this company operated more and more efficiently.

Through analysis, we found these ratios looked good and some of them were even better than the industry level. The ratio analysis showed Calaveras Vineyards was a healthy company and had an optimistic future. New Scenario A new scenario was drawn in order to assess how the financial health of the company would be if the COGS and SG&A were higher than the predicted by the company initially. In this situation, it is possible to see that the company is still able to operate under the conveants imposed by Goldengate Capital.

Additional consideration and recommendation: We based our analysis on the ratio analysis done by Anne Clemen. The ratio analysis shows us favourable trend about financials about this company. The leverage ratio goes on reducing and the times interest earned as well as Profit margin show favourable forecasts. Based on our current analysis, we think Calaveras had good profitability and has enough ability to service the debt, and we agreed that Anne Clemens should participate in the loan. However, there are still some factors that can influence our evaluation of Calaveras.

For example, if the price of its wine decreased quickly because of intensive competition or there was a big drop in the production of grape due to some catastrophe, the sales revenue will decreased dramatically, which would result in a shrunken free cash flow and influence its ability to pay back the loan. In Calaveras Vineyards – Team No. 1 18-Feb-2013 addition, if the cost of goods sold increased quickly because of a sudden increase of material price or the SG&A soared up for expanding marketing and advertising to compete with competitors, the free cash flow would also decreased dramatically.