Pacific Grove Spice Company

Topics: Banking And Finance

Essay, Pages 2 (294 words)

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The Pacific Grove Spice Company is currently searching for a new business venture that will help relieve some of the current financial restraints put on the company by their bank. Pacific Grove sources funds through this large regional bank in the form of short-term notes payable (backed by the company’s accounts receivable) and long-term debt supported by the firm’s other assets and earnings power. The bank has been willing to lend up to 81 % of the company’s accounts receivable, an amount that Pacific Grove is constantly at the limit of, due to the fact that the company has been experiencing robust growth in sales and assets.

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Due to the financial crisis of 2008, banks were under constant pressure to limit possible losses on loans. Pacific Grove’s current total debt is $37. 172 million, which is equal to 62% of its total assets and 216% of owners’ equity, while the company’s equity multiplier is 3. 47 and its times interest earned was only 2. 15 times. Because Pacific Grove’s total debt is so high, the bank isn’t as comfortable with lending as it once was.

The bank has made it clear that it would like to Pacific Groves total debt come down to 55%, while bringing the equity multiplier down to less than 2. Times by June 30, 2012. After performing a financial ratio analysis, the executive staff and finance department of Pacific Grove has projected that although it will not meet the bank’s terms by 201 2, it will meet them over the next four years through a combination of a slow down from previously robust sales growth, the stabilization of operating income and a new business venture.