The purpose of this analysis is to determine if Goldengate Capital should participate in a $4.5 million management acquisition of Calaveras Vineyards. Located in Alameda Valley, California, Calaveras Vineyards sits on 220 acres, consisting of 175 acres of vineyards, and 45 acres of equipment sheds, a winery building, and a small farmhouse with guestrooms, offices, and sales room.
Current management of Calaveras, Stout PLC, prepared pro forma financial statements for fiscal years ending 1990, 1991, 1992, and 1993. This information is being used to examine historical data and look for relevant patterns in order to further valuate Calaveras Vineyards.
Sales increased from $2.4 million in 1990 to $2.8 million in 1991. In 1992 Calaveras started to produce premium wines with increasing average industry prices. Although sales decreased from 1992 to 1993, cash flow improved immensely. Increasing the average price, and introducing premium wines, allowed Calaveras to gain a higher profit margin. Based on the pro forma historical financial statements, a comparative analysis has been completed to identify Calaveras’ position among other manufacturers of wine and brandy.
Calaveras, when compared to other manufacturers industry-wide, may have not have the capability to pay its obligations. The current ratio of 0.4 is less than 1.0, indicating that Calaveras does not have enough current assets to cover their liabilities, to include equity. Although the current ratio is low, this does not mean there is a critical problem. Management should be aware and address quickly to determine what action to take.
The assets to sales ratio indicates that Calaveras somewhat efficient in managing its assets in the relation the revenue generated. The higher the number the less investment is needed in order to generate revenue. Calaveras falls somewhere in between the upper and median quartile. They will need to invest in order to generate more revenue.
Calaveras’ is producing a 10% return on sales, above the upper quartile of industry norms. This means the vineyard is growing more efficient and providing growing profits. The return on assets ratio falls between the upper quartile and median quartile of the industry norm, and illustrates how well management is employing the company’s assets. With rate of 4.2% Calaveras is doing better than some of their competitors utilizing assets, but may need to invest to yield a higher rate, which will attract potential partners and lenders.
Forecast assumptions were used to project cash flow in the next 5 years. All assumptions are have been analyzed for reasonableness and work to generate a forecasted Income statement and balance sheet. A growth rate of 2% may not be sustainable, but it is conservative and will be used in discounting cash flows. Depending on how Calaveras will utilize free cash flows, capital expenditures may increase, resulting in a decrease in cash flows. However, these expenditures should yield a higher return on sales, and increase cash flows.
Based on the forecasted income statement and balance sheet a discounted cash flow is calculated, using the weighted average cost of capital to discount cash flows.