The document analyzes the financial ratios of Ryan Boot Company compared to industry averages. It finds that Ryan has lower profit margins and asset turnover. It also calculates that Ryan's break-even point in sales is $5.25 million and cash break-even point is $4 million. The document notes that Ryan has high debt levels and receivables, and recommends reducing receivables and improving profitability. It also warns that increasing sales without increasing assets would require more working capital.

1. Problem:
A. Analyze Ryan Boot Company, using ratio analysis. Compute
the ratios.
B. In your analysis, calculate the overall break-even point in
sales dollars and the cash break-even point.

2. Answer:
A)
Ryan Boot Company
Analysis Ratios
Ryan Boot
Industry
Profit margin
$292,500 ÷ 7,000,000
4.18%
5.75%
Return on assets
$292,500 ÷ 8,130,000
3.60%
6.90%
Return on equity
$292,500 ÷ 2,880,000
10.16%
9.20x
Receivables turnover
$7,000,000 ÷ 3,000,000
2.33x
4.35x
Inventory turnover
$7,000,000 ÷ 1,000,000
7.00x
6.50x
Fixed asset turnover
$7,000,000 ÷ 4,000,000
1.75x
1.85x
Total asset turnover
$7,000,000 ÷ 8,130,000
0.86x

3. 1.20x
Current ratio
$4,130,000 ÷ 2,750,000
1.50x
1.45x
Quick ratio
$3,130,000 ÷ 2,750,000
1.14x
1.10x
Debt to total assets
$5,250,000 ÷ 8,130,000
64.58%
25.05%
Interest coverage
$700,000 ÷ 250,000
2.80x
5.35x
Fixed charge coverage
($700,000 + $200,000)/$250,000 + $200,000 + ($65,000/ (1-.35)
= $900,000/$550,000
1.64x
4.62x
B)
BEP in sales dollars
First we must calculate the contribution margin.
CM = Sales – Variable expenses
CM = $7,000,000 – 4,200,000
CM = $2,800,000
Contribution Margin Ratio = CM ÷ Sales
CMR = $2,800,000 ÷ 7,000,000
CMR = 40%
BEP = Total Fixed Assets ÷ CMR

4. BEP = $2,100,000 ÷ 40%
BEP = $5,250,000 in sales dollars
Cash BEP = same as above accept the non cash expenses would
be removed from the fixed assets per the instructor help.
Cash BEP = (TFA – Non Cash expenses) ÷ CMR
Cash BEP = ($2,100,000 – 500,000) ÷ 40%
Cash BEP = $1,600,000 ÷ 40%
Cash BEP = $4,000,000
C)
Based on Part A), the company has low profit margin than the
industry and the asset turnover ratio is very slow (0.86x Vs
industrial value of 1.20x). It has resulted in lowering return on
overall asset of the company. Ryan has higher ROE when
compared to the industry, but this was achieved only through
higher leverage and not through the net margin of the company.
Receivables turnover of the company is comparatively lesser
than the industry at 2.33x when compared to industrial value of
4.35x. Inventory turnover ratio of the company is competitive
but fixed asset turnover ratio of the company is slightly below
than the industrial average.
Both the liquidity ratios that is current ratio and quick ratio of
the company is above the industrial average that there is no
difficulty for them in meeting their short-term obligations.
Company’s liquidity position is good and better than industrial
average.
Higher proportion of debt in the capital has created significant
impact on both interest coverage and fixed charge coverage
ratio of the company. Lease obligation and sinking fund
obligation has pulled down the fixed charge coverage ratio

5. further.
Unusual higher level of accounts receivables is the main reason
for slower asset turnover ratio.
Based on part B), it is clear that Ryan is operating at a sales
volume that is 1,750,000 above the traditional breakeven point
and 3,000,000 above the cash break-even point which is good
for the company. Lender/creditor mainly the bankers will be
worried about the increasing amount of debt in the capital.
In this case, company will be questioned by the bankers about
the reason for such an increase in debt and usage of their funds
as this will have adverse effect on the repaying ability of the
company. From the balance sheet of the company it is clear that
there is huge proportion of asset already held by the company,
therefore this huge amount of debt would have not been used for
any expansion. It is essential for the company to reduce the
level of accounts receivables of the company instead of
increasing them.
One of the possibilities for the usage of fund may be the
repayment of current notes payable worth $400,000. It can be
acceptable if in case company is in a position to demonstrate its
ability in meeting their future obligations. Pro-forma financial
statement and projected cash flow statement especially the cash
flow generating capacity of the company has to be monitored by
the banker before making any decision. Loan can be
processed/accepted only if the company is in a position to pull
down their accounts receivables balance and able to improve
their overall profitability.
If there will be increase in sales by 20% without increase in the
total assets of the company, there will increase in the required
funds. Without increase in the required amount, company will
not be in a position to meet their requirements. Increase in sales

6. requires increased requirement of raw materials and other
operation costs which in turn will increase the working capital
requirement of the company. This will increase the short-term
obligation of the company.