In order to expand sales, PGI has kept its prices constant over the last five years for water turbines. Wind turbine prices were decreased in 2020 only in order to incentivize customer business during covid; this was reversed in 2021. Only solar turbines had annual price increases. By comparison, competitors have increased prices annually. 

PGI also offers its distributors terms of 2/10, net 30, which vary from the industry standard of net 30. Most distributors took advantage of these terms over the past five years. 

PGI designs and assembles its products in Canada but sources its components globally. As a precautionary measure, to guard against supply interruptions caused by strikes, material shortages, and transportation delays, it stockpiles many of its key parts. Its accounts payable relate primarily to inventory purchases. Industry standard credit terms are 3/15, net 60 and most suppliers charge interest of 10 percent per annum on any overdue accounts. 

In order to remain competitive with low-wage countries, PGI invested heavily in factory automation, but has had difficulties with many of the complex systems. Breakdowns and software "bugs" are common place as most of the equipment was bought from a low-cost supplier, which has since gone bankrupt. Low educational standards also made training difficult and lowered production efficiency. It was thought automation would allow the company to reduce finished goods inventory though just-in-time production, but the frequent breakdowns made it necessary to carry more stock. 

To accommodate company growth, PGI built a new corporate headquarters, R&D facility and distribution centre in 2019. A number of existing buildings were considered, but a new facility in an expensive area of Toronto was constructed to increase the profile of the company. 

PGI has not paid any dividends to date. Debt had already increased significantly due to growth and the new facilities, and was then compounded due to the collapse of revenues. Since 2020, management had to bear down and managed to improve the levels of debt. Terms loans and mortgages were negotiated with five different banks to diversify its funding sources. PGI is listed on the Toronto and New York Stock Exchanges and is considering going to the market to raise more equity through a secondary offering. To avoid losing control, the three founding shareholders have agreed to issue only non-voting common shares, but is appears the market has lost its appetite for this type of security. PGI maintains a $1,500,000 line of credit with Western Canadian Bank to finance seasonal variations in net working capital. The loan must be 200 percent secured by inventory and accounts receivable. Also, to comply with the different loan agreements, the following ratios must be maintained: 

• The current ratio must be kept above 2.5; 
• the long-term debt to total capitalization, measured as long-term debt / (long-term debt + equity), must remain below 50 percent; and 
• the cash flow coverage ratio, measured as EBITDA / (Interest + Current Portion of LT Debt) above 2.0. 

Please fill out all the financial ratios, including the 5-way analysis (ROE) year-wise, with detailed calculation explanations in very simple terms.

 

write the conclusion (financial decision) based upon each ratio, right from Liquidity to 5-way ROE analysis, in a very simple way with a detailed explanation.

Power Green
Income Statements
	2018	2019	2020	2021	2022
Sales	$ 699,005,000	$ 891,945,500	$ 506,443,300	$ 487,421,800	$ 783,601,000
Cost of Goods Sold	426,250,000	550,357,100	323,504,700	306,867,800	499,025,500
Gross Profit	272,755,000	341,588,400	182,938,600	180,554,000	284,575,500
Operating Costs
Selling and Distribution	73,233,100	91,395,900	80,423,200	60,294,100	89,722,300
Research & Development	67,663,700	87,589,000	87,564,000	51,228,000	74,363,700
Administration	23,936,100	34,108,900	39,502,600	22,908,800	34,478,400
Depreciation & Amortization	48,556,200	60,758,400	62,517,400	61,530,300	64,200,800
Operating Profit	59,365,900	67,736,200	-87,068,600	-15,407,200	21,810,300
Interest	9,693,500	10,131,200	9,541,500	13,421,200	14,919,500
Earnings Before Taxes	49,672,400	57,605,000	-96,610,100	-28,828,400	6,890,800
Taxes	14,901,720	17,281,500	-28,983,030	-8,648,520	2,067,240
Net Income	$ 34,770,680	$ 40,323,500	($ 67,627,070)	($ 20,179,880)	$ 4,823,560

Balance Sheets
	2018	2019	2020	2021	2022
Cash	$ 25,340,000	$ 26,800,300	$ 5,630,000	$ 15,320,100	$ 23,430,300
Accounts receivable	32,364,900	41,298,300	23,449,000	22,568,300	36,281,800
Parts Inventory	95,760,300	122,134,000	326,163,600	174,872,600	128,516,200
WIP Inventory	43,427,500	54,281,800	76,223,000	51,516,400	57,422,100
Finished Goods Inventory	79,411,000	93,485,300	163,968,100	130,163,000	117,578,600
Total Current Assets	$ 276,303,700	$ 337,999,700	$ 595,433,700	$ 394,440,400	$ 363,229,000
Land, plant, and equipment, net	445,230,840	595,750,840	600,601,740	592,134,240	616,526,140
Intangibles	50,340,030	79,343,030	94,035,830	91,535,430	96,816,530
Total Non-Current Assets	$ 495,570,870	$ 675,093,870	$ 694,637,570	$ 683,669,670	$ 713,342,670
Total Assets	$ 771,874,570	$ 1,013,093,570	$ 1,290,071,270	$ 1,078,110,070	$ 1,076,571,670
Accounts payable	$ 68,700,400	$ 95,620,000	$ 167,500,300	$ 85,259,400	$ 98,361,100
Line of credit	460,000	$ 506,000	$ 557,000	$ 613,000	$ 674,000
Current portion of long-term debt	25,743,300	25,743,300	44,875,600	72,765,100	57,641,700
Total current liabilities	$ 94,903,700	$ 121,869,300	$ 212,932,900	$ 158,637,500	$ 156,676,800
Long-term debt	234,030,000	407,959,900	661,501,070	524,015,150	519,613,890
Total Liabilities	328,933,700	529,829,200	874,433,970	682,652,650	676,290,690
Shareholders' equity	442,940,870	483,264,370	415,637,300	395,457,420	400,280,980
Total Liabilities and Equity	$ 771,874,570	$ 1,013,093,570	$ 1,290,071,270	$ 1,078,110,070	$ 1,076,571,670

Liquidity	2019	2020	2021	2022		2022
Current Ratio						3.13x
Quick Ratio						1.71x
Cash Ratio						0.75x
Asset Management
Parts Inventory Days (avg)						30.85 days
WIP Inventory Days (avg)						14.57 days
FG Inventory Days (avg)						33.13 days
A/R Turnover (avg)						31.83 days
A/P Turnover (avg)						23.96 days
Cash Conversion Cycle						86.43 days
Fixed Assets Turnover						2.32x
Total Assets Turnover						1.33x
Long-term Debt Paying Ability
Debt Ratio						43.9%
LT Debt to Total Capitalization						36.2%
Times Interest Earned						6.69x
Cash Flow Coverage						3.35x
Profitability
Gross Profit Margin						40.66%
Operating Profit Margin						9.90%
Net Profit Margin						5.94%
Return on Assets						7.90%
Return on Equity						14.07%
5-Way Analysis of ROE	2019	2020	2021	2022
EBIT/Sales
EBT/EBIT
NI/EBT
Total Asset Turnover
Equity Multiplier (Leverage)
ROE

Transcribed Image Text:

Parts inventory days (avg) WIP inventory days (avg) 30.85 days 14.57 days FG inventory days (avg) 33.13 days Accounts receivable days (avg) 31.83 days Accounts payable days (avg) 23.96 days Cash conversion cycle 86.43 days Fixed assets turnover 2.51x Total assets turnover 1.33x Debt ratio 43.9% Long-term debt total capitalization 36.2% Times interest earned 6.69x Cash flow coverage 3.35x Gross profit margin Operating profit margin Net profit margin Return on assets Return on equity 40.66% 9.90% 5.94% 7.90% 14.07% Parts inventory days (avg) WIP inventory days (avg) 30.85 days 14.57 days FG inventory days (avg) 33.13 days Accounts receivable days (avg) 31.83 days Accounts payable days (avg) 23.96 days Cash conversion cycle 86.43 days Fixed assets turnover 2.51x Total assets turnover 1.33x Debt ratio 43.9% Long-term debt total capitalization 36.2% Times interest earned 6.69x Cash flow coverage 3.35x Gross profit margin Operating profit margin Net profit margin Return on assets Return on equity 40.66% 9.90% 5.94% 7.90% 14.07%