Week 5_ Financial Valuation Project Milestone 2

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Jan 9, 2024

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Week 5: Financial Valuation Project Milestone 2 1 Week 5: Financial Valuation Project Milestone 2 Jesse Smithwick ACCT 535 -1 Point University

Week 5: Financial Valuation Project Milestone 2 2 Black Rifle Coffee Company Ratio Analysis In an examination of the financial performance of Black Rifle Coffee Company for the year 2022, a detailed analysis of various financial ratios underscores significant challenges and anomalies warranting attention. The financial ratios depicted in the appendices reveal that BRCC faces considerable hurdles, appearing highly unprofitable, inefficient, and risky. Key indicators, such as negative returns on assets and equity, adverse operating and net profit margins, unfavorable operating cash flows, and distressing interest coverage ratios, indicate a concerning financial position. The Return on Assets (ROA) is particularly alarming, witnessing a sharp decline to -215.4%, signaling a severe downturn in profitability (Appendix A). A deeper investigation into ROA components, including Profit Margin and Asset Turnover, is imperative to grasp the underlying factors contributing to this negative trend (Wahlen et al., 2014). Similarly, the Return on Common Equity (ROCE) raises eyebrows with an exceptionally high value, necessitating an examination of Profit Margin, Asset Turnover, and Capital Structure Leverage components to identify potential miscalculations or irregularities (Wahlen et al., 2014). BRCC exhibits elevated leverage, low liquidity, and low asset turnover, further amplifying concerns. The company's growth rates, seemingly inflated by significant losses in the prior year, render its stock market-based ratios inconclusive due to the absence of earnings or dividends (Annual Reports, 2023). Operational performance metrics, encompassing Gross Profit, Operating Profit, and Net Income margins, all register negative values, indicating a broader challenge with the company's profit generation from operations.

Week 5: Financial Valuation Project Milestone 2 3 Although there are signs of improvement in liquidity, solvency, efficiency, and profitability compared to the previous year, BRCC still lags behind industry averages in various aspects ( Yahoo is part of the Yahoo family of brands , n.d.) . Noteworthy changes include enhanced liquidity ratios, attributed to increased cash and cash equivalents, accounts receivable, and inventory, reflecting growth in sales and operational expansion. Solvency ratios show improvement, with decreased debt-to-asset and debt-to-equity ratios, indicating reduced reliance on debt financing and enhanced financial leverage. Efficiency ratios demonstrate better management of working capital and asset utilization, driven by increased sales and faster turnover of goods. Profitability ratios showcase increased margins and returns, driven by higher sales volume and a more cost-efficient structure. The changes in financial ratios from the previous year are primarily attributed to a significant increase in net loss, stemming from a $1.5 billion impairment charge related to goodwill and intangible assets. This charge reduced assets and equity while increasing leverage and solvency ratios. Lower revenues and higher operating expenses further impacted gross and operating profit margins, and liquidity and asset turnover ratios declined, reflecting challenges in converting assets into cash and generating sales. The statement of cash flows reveals that BRCC experienced a net increase in cash and cash equivalents of $2.4 million (Annual Reports, 2023). Operating activities generated $8.9 million in cash, mainly from net income and adjustments for non-cash items (Annual Reports, 2023). Investing activities utilized $5.6 million for property and equipment purchases and acquisition, while financing activities used $0.9 million for debt repayment and dividend

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Week 5: Financial Valuation Project Milestone 2 4 payments (Annual Reports, 2023). Overall, a nuanced understanding of the financial reports, industry dynamics, and external factors is essential for a comprehensive assessment of BRCC's financial health, enabling informed decision-making and strategic planning for the future. Valuation Method The type of valuation method that BRCC uses is the historical cost method, which measures the assets and liabilities at their original acquisition or issuance prices (Wahlen et al., 2014). BRCC uses this method for its property and equipment, inventory, accounts receivable, accounts payable, and long-term debt. The benefits of this method are that it is simple, objective, and verifiable and that it provides a consistent basis for recording and reporting transactions and events. Common-Size (Percentage) Financial Statements The common-size financial statements from the FSAP spreadsheet show the percentage of each item to a common base, such as total assets, total liabilities, equity, or total revenues (Wahlen et al., 2014). This allows for a better comparison of the relative size and composition of the items across different years or different companies. Compared to the industry data, the company's common-size financial statements show that the company has a lower proportion of current assets, a higher proportion of non-current assets, a higher proportion of current and non-current liabilities, and a lower proportion of equity ( Annual Reports, 2023) . The company also has a lower gross profit margin, a higher operating expense ratio, and a lower net income margin. Conclusion

Week 5: Financial Valuation Project Milestone 2 5 The financial ratios for the company are slightly better than the previous year, but still worse than the industry averages, indicating that the company is performing below the industry standards and has room for improvement. The company has lower liquidity, solvency, efficiency, and profitability than its peers and a higher risk of financial distress. The company's financial situation is mainly due to the competitive and challenging nature of the coffee industry, the high fixed costs and debt obligations, and the low margins and returns. The company needs to improve its cash flow management, reduce its debt burden, increase its sales growth, and enhance its operational efficiency and cost control.

Week 5: Financial Valuation Project Milestone 2 6 Reference Annual reports. (2023). Black Rifle Coffee Company. https://ir.blackriflecoffee.com/sec-filings/annual-reports##document-363-0001104659-22-034159 -2 Wahlen, J. M., Baginski, S. P., & Bradshaw, M. (2014). Financial reporting, financial statement analysis, and valuation. Cengage Learning. Yahoo is part of the Yahoo family of brands . (n.d.). https://finance.yahoo.com/quote/BRCC/?ssp=1&darkschemeovr=1&setlang=en-US&safesearch= moderate

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