Ace Institute of Management EMBA Fall 2011

Assignment- 1
Financial Analysis of Sliver River Manufacturing Company

BY

SABIN MAHARJAN SACHIN SHRESTHA RAJESH PANDEY RAJIB PATHAK RUPESH KUMAR SHAH

SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS OF EXECUTIVE MASTER OF BUSINESS ADMINISTRATION FOR COURSE CORPORATE FINANCIAL DECISION IN ACE INSTITUTE OF MANAGEMENT

To

Prof. Radhe Shyam Pradhan (Phd.) COURSE INSTRUCTOR Corporate Financial Decision

Date - 27th July 2012

1| Financial Analysis of Silver River Manufacturing Company

Ace Institute of Management EMBA Fall 2011

TABLE OF CONTENT
1. General Background 2. Issues 1a: Sources and uses 3. Issues 1b: Computation of ratios and analysis 4. Issues 2: Analysis of Strength & Weakness 5. Du Pont Analysis 6. Altmans Z Factor 7. Issues 3: Projection of Financial Statement 2006 & 2007 8. Issue 4: Projection of Financial ratios 2006 & 2007 & analysis 9. Issue 5: Revision of Financial Statement & ratios & analysis

Pages

10. Issue 6: MNCB Prospective

11. Issue 7: Alternatives

12. Conclusion

2| Financial Analysis of Silver River Manufacturing Company

Ace Institute of Management EMBA Fall 2011

General Background
This is a typical case focusing on the financial position of the Silver River Manufacturing Company (SRMC) manufacturing industry based on farms economy which designs and produces farm and utility trailers, specialized livestock carriers, and mobile home chassis. The case provides information to look into the deteriorating financial position of the SRMC over the time period. Data for the year 2003, 2004, and 2005 provides the information that SRMC is doing quite well in the year 2003. SRM had experience high and relatively steady growth in sales, assets and profit. However, due to recession starts of the 2000s in nations farm economy towards the end of 2003, things began to stand adversely for SRM with fall in demand. The analysis of data shows that the company has very difficult time in the year 2005 where most of the indicators are very weak. While analyzing the case, it is observed that the company has very difficult time in the year 2005.

List of Financial Statement of SRM

Silver River Manufacturing Company Balance Sheet for Year Ended December 31 (USD in 000) Particulars Assets Cash Account Receivable Inventory Current assets Land, Building, Plant and Equipment Accumulated depreciation Net fixed assets Total assets Liabilities and equities Short-term bank loans Account Payable Accruals Current liabilities Long-term bank loans Mortagage Long-term debt Total liabilities Common stock 2003 5,148.31 17,097.75 18,933.75 41,179.81 17,760.75 (2,996.25) 14,764.50 55,944.31 3,187.50 6,763.88 3,442.50 13,393.88 6,375.00 2,868.75 9,243.75 22,637.63 23,269.00 2004 4,002.48 18,462.00 33,028.87 55,493.35 20,100.37 (4,653.75) 15,446.62 70,939.97 5,100.00 10,506.01 5,100.00 20,706.01 9,562.50 2,601.00 12,163.50 32,869.51 23,269.00 2005 3,905.77 29,356.86 46,658.62 79,921.25 22,873.50 (6,693.75) 16,179.75 96,101.00 18,232.50 19,998.39 7,331.28 45,562.17 9,562.50 2,339.62 11,902.12 57,464.29 23,269.00

3| Financial Analysis of Silver River Manufacturing Company

Ace Institute of Management EMBA Fall 2011

Retained earnings Owners' equity Total Capital

10,037.68 33,306.68 55,944.31

14,801.45 38,070.45 70,939.96

15,367.72 38,636.72 96,101.01

Silver River Manufacturing Company Income statement for Year Ended December 31 (USD in 000) Particulars Net Sales Cost of goods sold Gross profit Administrative and selling Depreciation Miscellaneous expenses Total operating expenses Earning before Interest and tax Interest on short-term loans Interest on Long-term loans Interest on mortagage Net income before tax Taxes Net income Dividends on stock Additions to retained earnings 2003 170,997.50 135,267.74 35,729.76 12,789.79 1,593.75 2,027.49 16,411.03 19,318.73 318.75 637.50 259.83 18,102.65 8,689.27 9,413.38 2,353.35 7,060.03 2004 184,658.25 150,131.22 34,527.03 15,344.64 1,657.50 3,557.25 20,559.39 13,967.64 561.00 956.25 235.58 12,214.81 5,863.11 6,351.70 1,587.93 4,763.77 2005 195,731.63 166,642.58 29,089.05 16,880.96 2,040.00 5,724.72 24,645.68 4,443.37 1,823.25 956.25 211.90 1,451.97 696.94 755.03 188.76 566.27

Silver River Manufacturing Company Changes in equity accounts for Year Ended December 31 (Thousands of Dollars) Particulars Beginning retained earnings Add net income after taxes Subtract dividends on stock Additions to retained earnings 2003 2,977.64 9,413.38 (2,353.35) 10,037.67 2004 10,037.68 6,351.70 (1,587.93) 14,801.45 2005 14,801.45 755.02 (188.76) 15,367.71

4| Financial Analysis of Silver River Manufacturing Company

Ace Institute of Management EMBA Fall 2011

Some of the key chain events that lead SRM to declining financial position are as follows: 1. Aggressively Reduced price to stimulate sales with believe that key to sustained profits and superior market performance was sales growth and achievement of high share of Market. 2. Increase in production and inventories to meet sales forecast. 3. Steep Increase in Accounts receivable (especially in 2005) due to favorable credit terms and relaxed credit standards as a part of integrated market penetration plan. 4. Increase in Long-Term (2004), and short-term credit lines in both 2004 and 2005. The given financial statement and calculation of various ratios indicates that if the firmed steps are not being taken, the probability of bankruptcy is very high. All the indicators are very weak and it is a hard time to think upon to boost the financial position of the organization. SRMC has taken loan from Marian Country National Bank (MCNB) and bank is very much concern about the repayment of loan after analyzing the financial data provided by SRMC. The analysis shows that ratios under all the four categories (liquidity, leverage, assets management and profitability ratios) have fall over the time period and it is worst in the year 2005. The ratios for 2005 suggest that the company could go to the bankruptcy in near future. These analyses compel bank to think of the immediate repayment of loan and could force into bankruptcy, which is the legal right of the bank Therefore, SRMC forecasted the projected financial statement of the company for next two years taking some of the firmed measures like increasing sales in very lucrative area and moving away from traditional agriculture, reducing cost of goods sold, administration and selling expenses and miscellaneous expenses, reducing average collection period to convince the bank to reclassification of loan. Moreover, SRMC is Financial Indicator Summary 1.EBIT 2. Total Assets 3. Net Sales 4.Total Market Value of shares (in $ 000)= Total earnings *P/E Ratio 5. Total Liabilities 6. Current Assets 2003 19,318.73 55,944.31 170,997.50 62,128.31 22,637.63 41,179.81 2004 13,967.64 70,939.97 184,658.25 33,664.01 32,869.51 55,493.35 2005 4,443.37 96,101.00 195,731.63 3,473.09 57,464.29 79,921.25

7. Current Liabilities 13,393.88 20,706.01 45,562.17 8. Retained Earnings 10,037.68 14,801.45 15,367.72 also thinking to ask for more loan of $6,375,000 for the new plant assuming that this step led to company to expand its business and strengthen financial position.
5| Financial Analysis of Silver River Manufacturing Company

Ace Institute of Management EMBA Fall 2011

Finally, this case provides opportunity to analyze financial data of the SRMC and place our independent opinion on the number of financial analysis indicators including financial statement, which helps us to strength our capabilities to compare financial position within the company and between the companies for forecasting the future course of action.

Financial Performance of SRM: Strength and Weakness

SRMs products are not subject to technological obsolescence or to deterioration and in those instances where technology is a factor to be considered, SRM holds several patents with which it can partially offset some o f the risks. SRM is led by Mr. White who is considered as a pillar of the community and has been able to maintain excellent rapport with his suppliers and lenders. The demand for the products of SRM despite hit in the short run is in fact profitable in the long run. The plant and machinery and the size of the firm are strengths based on which SRM has been able to become a large producer and supplier of farm related equipments. Before 2004, SRM was sound in all respects of business which is evident from the following statement of changes in financial positions and analysis of key financial ratios. Analysis on changes in Financial Position Year ended December 31 The reason for the negative balance is because of increase in credit purchase (AP and NP), reduction in price to increase sells, increases in administrative and miscellaneous expenses. The negative balance shows that the organization in not in a position to pay current debt without liquidating any long-term assets.

After calculating the changes in Financial Position for 2005, it was observed that in totality Net Working Capital is negative. This analysis shows that the organization's Current Liability is more than Current Asset.

6| Financial Analysis of Silver River Manufacturing Company

Ace Institute of Management EMBA Fall 2011

Silver River Manufacturing Company Statement of Changes in Financial Position Year Ended December 31 for (Thousands of Dollars) Particulars Sources of Funds Net Income after taxes Depreciation Funds from Operation Long Term loan Net decrease in working capital Total Sources Application of funds Mortage change Fixed assets change Dividends on stock Net increase in working capital Total uses Analysis of changes in working capital Increase (decrease) in current assets Cash change Account Receivable change Inventory change CA change Increase (decrease) in current liabilities Account Payable change Short-term bank loan change Accruals change CL change Net increase (decrease) in working capital 2004 6,351.70 1,657.50 8,009.20 3,187.50 11,196.70 267.75 2,339.62 1,587.93 7,001.41 11,196.71 2005 755.02 2,040.00 2,795.02 428.26 3,223.28 261.38 2,773.13 188.76 3,223.27

(1,145.83) 1,364.25 14,095.12 14,313.54 3,742.13 1,912.50 1,657.50 7,312.13 7,001.41

(96.71) 10,894.86 13,629.75 24,427.90 9,492.38 13,132.50 2,231.28 24,856.16 (428.26)

Statement of Ratio and Analysis:

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Ace Institute of Management EMBA Fall 2011

Silver River Manufacturing Company Ratio Analysis Year Ended December 31 Particulars Liquidity ratios Current ratio Quick ratio Leverage ratios Debt ratio(%) Times interest earned Asset management ratios Inventory turnover (Cost)a Inventory turnover (Selling)b Fixes assets turnover Total asset turnover Average collection period Profitability ratios Profit margin (%) Gross profit margin (%) Return on total assets Return on owners equity Potential failure indicator Altman Z factor where, X1 X2 X3 X4 X5 3.09 0.50 0.18 0.35 2.75 3.06 2.62 0.49 0.21 0.20 1.03 2.60 2.04 0.36 0.16 0.05 0.06 2.04 1.81/2.99 7.14 9.03 11.58 3.06 36.00 4.55 5.59 11.95 2.06 35.99 3.57 4.19 12.10 2.04 53.99 5.70 7.00 12.00 3.00 32.00 2003 3.07 1.66 2004 2.68 1.08 2005 1.75 0.73 Industry Average 2.50 1.00

40.46 15.89

46.33 7.97

59.80 1.49

50.00 7.70

5.50 20.89 16.83 28.26

3.44 18.70 8.95 16.68

0.39 14.86 0.01 0.02

2.90 18.00 8.80 17.50

Ratio Analysis

8| Financial Analysis of Silver River Manufacturing Company

Ace Institute of Management EMBA Fall 2011

Financial ratio table shows the financial ratios of SRM for 2003, 2004 and 2005. It can be observed that every performance indicator of the SRM's business was worsening through the years and in comparison to the industry averages as well. The liquidity, profitability, leverage, returns and the market indicators all gave way. Of them, the heightened business activities of SRM severely hampered the liquidity and returns. However, the Altman Z-Factor for 2004 and 2005 became 2.6 and 2.88 respectively, which lies in the Grey Zone. It shows that there is a probability for bankruptcy in near future. Therefore the SRMC should work closely to improve its overall financial position. Liquidity Ratio Both the Liquidity Ratios (Current & Quick) are low as compared to the Industry average. So SRMC does not have sound financial position to pay its current debt in time.

Leverage Ratios Debt Ratio compared to Industrial Average is very high. This indicates the company has more debt compared to its Assets. Times interest earned is very low in comparison to industries average. This indicates that companys interest paying capacity is very low. This is a Key Performance Indicator (KPI) for the bank to approve the loan proposal.

Asset Management Ratios Under Assets Management Ratio, Inventory Turnover Ratio for 2005 is lower than the Industrial Average as well 2003 and 2004. This ratio indicates that Inventory Turnover Days is very high (102 days) that means SRMC takes longer time to convert the raw material to Fixed Assets. Likewise, Average Collection Period is also high. That means more number of days required for the collection of receivables where as Assets Turnover Ratio is also low. However Fixed Assets Turnover Ratio seems satisfactory.

Profitability Ratio Profitability Ratio seems to be alarming. Profit Margin, ROA and ROE are significantly low. These ratios indicate low return on sales, assets and equity. Based on the financial data, it seems that this is because of the excessive expenditure and lower selling price.

9| Financial Analysis of Silver River Manufacturing Company

Ace Institute of Management EMBA Fall 2011

In conclusion, based on the comparison of different ratios, we found that the situation is not favorable. Liquidity Ratios dont meet standard limit of 2.1 and 50%. Likewise, Interest Earned Ratios that indicates the repaying of interest of the SRMC is also very low. These ratios show that SRM doesnt have capabilities to pay its debt and to generate sufficient profit. Therefore SRM should work on to reduce its expenditure and standardize the price of goods to increase the profit margin. It is also important to reduce the collection period and maximize the profit.

Du-Pont Identity Returns on Equity Du Pont Identity Net Profit Margin Total Assets Turnover Equity Multiplier Return on Equity = Total Assets Turnover X Net Profit Margin x Equity Multiplier 2003 5.50 3.06 1.68 28.27 16.64 2004 3.44 2.60 1.86 1.98 2005 0.39 2.04 2.49 Ind. Average 2.90 3.00 2.00 17.50

Du-Pont was developed by Du-Pont Corporation, which is a famous way of decomposing ROE into its 3 components viz. Profitability Margin, ROA and Equity Multiplier. Here Du-Pont Analysis indicates that the SRMC should focus to increase sales, reduce its expenses and maintain the price of the goods to increase profit margin. Before 2004, profitability ratios were very controlled and were in increasing trend so SRM maintained Net profit margin, Total Assets Turnover and Equity multiplier compared to industry average. Return on equity is high so as to increase the limit of debt portion. After 2004, the position of SRM changed due to lack of demand for farm equipment, so profitability decreased. SRM increased its production units to increase profitability. However, the growth of 8% (2004) and 6% (2005) in sales resulted in increment in Costs of Goods sold and decline in profits. As these growth rates were far lower than expected, SRM ended with piling inventories. In addition, the relaxed credit terms resulted in huge receivables with an average collection period of 54 days, a huge negative deviation of 22 days compared to the industry average. It was obvious, SRM started lagging behind timely repayments to its suppliers.

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Ace Institute of Management EMBA Fall 2011

The inventories grew by 74% (2004) and additional 41% in 2005. The receivable was bound to follow the league to an all time growth of 59% in 2005. As expected, the borrowings from MCNB fell too short to manage the working capital. By 2005 December, the payables had risen by 6 percentage points to 20% of the total assets.

Case Problems
Projection financial statement for year 2006 and 2007 of SRM and analyze the financial ratios and facts figures that will relevant for further business decision to Mr. White and negotiate with MCNB for renewal and extension of credit facilities. Judgment relating to extent new short-term credit facility of $6.375 million to SRM assuming the expectations of SRM for 2006 and 2007 materialize. The objectives are: 1. Analyze SRMs ability to retire its loans in 2006 and/or 2007. 2. Analyze SRMs ability to pay dividends as well as maintain minimum cash balance. 3. Analyze from the banks perspective regarding extension of existing loans and possibilities of renewal. 4. Analyze the alternatives credit withdraws by bank. Projected financial statements for projected sales and expenses based on following assumptions: 1. Mr. White's forecasts shall materialize 2. MCNB shall disburse additional short term loan of $6,375,000.00 to SRM 3. SRM shall be able to repay the loan by the sales from new plant by June 2006 4. The company does not pay dividends. 5. Cash is the balancing figure of 2006 and 2007.

Expectations Weighted Avg. Sales Growth Cost of Goods Sold Administrative Expenses Miscellaneous Expenses Average Collection Period Inventory Turnover (cost) PE Ratio Interest rate Federal and State Tax

2006 6% 82.50% 8% 1.75% 32 days 5.7 times 5.5 16% 48%

2007 9.50% 80% 7.50% 1.25% 32 days 5.7 times 6.5 16% 48%

Remarks of previous year sales of sales of sales of sales par with industry average par with industry average

11| Financial Analysis of Silver River Manufacturing Company

Ace Institute of Management EMBA Fall 2011

Based on the assumptions and actual data provided in the case for 2005, the following projected financial statements are prepared. Silver River Manufacturing Company Pro Forma Income Statements (Projected) Worksheet for Year End 2007 (Thousands of Dollars) Particulars Net Sales Cost of goods sold Gross profit Administrative and selling Depreciation Miscellaneous expenses Total operating expenses Earning before Interest and tax Interest on short-term loans Interest on Long-term loans Interest on mortagage Net income before tax Taxes Net income Dividends on stock Additions to retained earnings 2005 195,731.63 166,642.58 29,089.05 16,880.96 2,040.00 5,724.72 24,645.68 4,443.37 1,823.25 956.25 211.90 1,451.97 696.95 755.02 188.76 566.26 2006 Projected 207,475.53 171,167.31 36,308.22 16,598.04 2,422.50 3,630.82 22,651.36 13,656.86 3,937.20 956.25 190.54 8,572.87 4,114.98 4,457.89 4,457.89 2007 Projected 227,185.71 181,748.57 45,437.14 17,038.93 1,823.00 2,839.82 21,701.75 23,735.39 3,937.20 956.25 171.52 18,670.42 8,961.80 9,708.62 9,708.62

Silver River Manufacturing Company Pro Forma Balance Sheets (Projected) Worksheet for Year End 2007 (Thousands of Dollars) Particulars Assets Cash Account Receivable Inventory Current assets Land, Building, Plant and Equipment Accumulated depreciation Net fixed assets 2005 3,905.77 29,356.86 46,658.62 79,921.25 22,873.50 (6,693.75) 16,179.75 2006 Projected 36,060.25 18,442.27 30,029.35 84,531.87 29,248.50 (9,116.25) 20,132.25 2007 Projected 46,021.00 20,194.29 31,885.71 98,101.00 30,125.96 (10,939.20) 19,186.76

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Ace Institute of Management EMBA Fall 2011

Total assets Liabilities and equities Short-term bank loans Account Payable Accruals Current liabilities Long-term bank loans Mortagage Long-term debt Total liabilities Common stock Retained earnings Owners' equity Total Capital

96,101.00 18,232.50 19,998.39 7,331.28 45,562.17 9,562.50 2,339.62 11,902.12 57,464.29 23,269.00 15,367.72 38,636.72 96,101.01

104,664.12 24,607.50 15,994.88 9,301.13 49,903.51 9,562.50 2,103.75 11,666.25 61,569.76 23,268.75 19,825.61 43,094.36 104,664.12

117,287.76 24,607.50 16,794.62 11,626.41 53,028.53 9,562.50 1,893.75 11,456.25 64,484.78 23,268.75 29,534.23 52,802.98 117,287.76

Silver River Manufacturing Company Ratio Analysis Year Ended December 31, 2007 (Projected) Particulars Liquidity ratios Current ratio Quick ratio Leverage ratios Debt ratio(%) Times interest earned Asset management ratios Inventory turnover (Cost)a Inventory turnover (Selling) Fixes assets turnover Total asset turnover Average collection period Profitability ratios Profit margin (%) Gross profit margin (%) Return on total assets Return on owners equity
b

2005 1.75 0.73

2006 Projected 1.69 1.09

2007 Projected 1.85 1.25

Industry Average 2.50 1.00

59.80 1.49

58.83 2.69

54.98 4.69

50.00 7.70

3.57 4.19 12.10 2.04 53.99

5.70 6.91 10.31 1.98 32.00

5.70 7.12 11.84 1.94 32.00

5.70 7.00 12.00 3.00 32.00

0.39 14.86 0.01 0.02

2.15 17.50 0.04 0.10

4.27 20.00 0.08 0.18

2.90 18.00 8.80 17.50

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Ace Institute of Management EMBA Fall 2011

With assumption SRM Company have changed its policy of aggressive marketing sales promotion, fullmargin pricing, maintain standard industry credit terms and have tightened the credit standards. With this policy they have been able to reduce some of the expense and Cost of Goods Sold:

Cost of Goods Sold (COGS): 85 %( 2005) to 82.5% (2006) & 80 %( 2007). Administrative Expenses: 9 %( 2005) to 8% (2006) & 7% (2007). Miscellaneous Expenses: To 1.75 %( 2006) & 1.25(2007).

In conclusion, the Table 9 and 10, projection for 2006 and 2007 give the picture that the if the bank were to maintain the present credit lines and grant an additional $6.375 million short term loan effective from Jan 01, 2006, the company would be able to retire all $ 24,607,500 existing on Dec 31, 2006 because cash balance as on Dec 31, 2006 is (i.e. $ 10,373,780). Projected ratio for 2006 and 2006 are somehow positive. However, we cannot find very positive report or improvement in ratios. Due to increase in sales and income and decrease in expenses there are significant improvement found in time interest earned, profit margin ROA and ROE. Moreover Asset Management Ratios are also improved. Under Liquidity Ratios, the current ratio is not much improved to pay the current debt but quick ratio indicates that the SRM Company is also able to pay current debt. Overall, we can say that the SRM Company financial position shows improvement in number of areas but still there is a need to improve a lot. Debt ratio is still high and SRM Company should work in various areas to meet the industry average for the better future. $ 36,060,500 and even after retiring the $ 24,607,500 loan , the remaining cash balance $ 11,453,000 will be more than the requirement of cash balance @ 5 % of sales

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Ace Institute of Management EMBA Fall 2011

Revised Projected Financial Statement

Silver River Manufacturing Company Pro Forma Income Statements (Revised) Worksheet for Year End 2007 (Thousands of Dollars) Particulars Net Sales Cost of goods sold Gross profit Administrative and selling Depreciation Miscellaneous expenses Total operating expenses Earning before Interest and tax Interest on short-term loans Interest on Long-term loans Interest on mortagage Net income before tax Taxes Net income Dividends on stock Additions to retained earnings 2005 195,731.63 166,642.58 29,089.05 16,880.96 2,040.00 5,724.72 24,645.68 4,443.37 1,823.25 956.25 211.90 1,451.97 696.95 755.02 188.76 566.26 2006 Revised 207,475.53 171,167.31 36,308.22 16,598.04 2,422.50 3,630.82 22,651.36 13,656.86 1,968.20 956.25 190.54 10,541.87 5,060.10 5,481.77 1,370.44 4,111.33 2007 Revised 227,185.71 181,748.57 45,437.14 17,038.93 1,823.00 2,839.82 21,701.75 23,735.39 956.25 171.52 22,607.62 10,851.66 11,755.96 2,938.99 8,816.97

Silver River Manufacturing Company Pro Forma Balance Sheets (Revised) Worksheet for Year End 2007 (Thousands of Dollars) Particulars Assets Cash Account Receivable Inventory Current assets Land, Building, Plant and Equipment Accumulated depreciation Net fixed assets Total assets Liabilities and equities Short-term bank loans Account Payable 2005 3,905.77 29,356.86 46,658.62 79,921.25 22,873.50 (6,693.75) 16,179.75 96,101.00 18,232.50 19,998.39 2006 Revised 11,106.19 18,442.27 30,029.35 59,577.81 29,248.50 (9,116.25) 20,132.25 79,710.06 15,994.88 2007 Revised 20,175.54 20,194.29 31,885.71 72,255.54 30,125.96 (10,939.20) 19,186.76 91,442.30 16,794.62

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Ace Institute of Management EMBA Fall 2011

Accruals Current liabilities Long-term bank loans Mortgage Long-term debt Total liabilities Common stock Retained earnings Owners' equity Total Capital

7,331.28 45,562.17 9,562.50 2,339.62 11,902.12 57,464.29 23,269.00 15,367.72 38,636.72 96,101.01

9,301.13 25,296.01 9,562.50 2,103.75 11,666.25 36,962.26 23,268.75 19,479.05 42,747.80 79,710.06

11,626.41 28,421.03 9,562.50 1,893.75 11,456.25 39,877.28 23,268.75 28,296.02 51,564.77 91,442.05

Silver River Manufacturing Company Ratio Analysis Year Ended December 31, 2007 (Revised) Particulars Liquidity ratios Current ratio Quick ratio Leverage ratios Debt ratio(%) Times interest earned Asset management ratios Inventory turnover (Cost)a Inventory turnover (Selling)b Fixes assets turnover Total asset turnover Average collection period Profitability ratios Profit margin (%) Gross profit margin (%) Return on total assets Return on owners equity 6 0.01 0.02 9 12.10 2.04 53.99 3.57 4.1 5.70 6.91 10.31 2.60 32.00 5.70 7.12 11.84 2.48 32.00 5.70 7.00 12.00 3.00 32.00 9 2005 1.75 0.73 2006 Revised 2.36 1.17 2007 Revised 2.54 1.42 Industry Average 2.50 1.00

59.80 1.4

46.37 4.38

43.61 21.05

50.00 7.70

0.39 14.8

2.64 17.50 0.07 0.13

5.17 20.00 0.13 0.23

2.90 18.00 8.80 17.50

With revised projected data for 2006, 2007, presented in table 12, 13 and 14 it is found that the SRM Company is not able to pay regular dividend and minimum cash balance in 2006. However, the situation
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is progressive in 2007 where SRM Company can pay regular dividend and maintaining minimum cash balance. If that shot-term loan is paid 2006 the cash balance will be $ 4,736(000), which is less than 5% of sales. Whereas the cash balance will be $ 12,204(000) which is more than 5% of sales. Thus, If SRM Company can pay dividend but it has various impact as the ratios. Minimum cash balance is essential for the SRM Company. However, it seems that minimum cash balance (MCB) of 5% of total sales, ultimately affect on various ratios like current ratio, quick ration. If SRM Company cannot invest this cash to generate income, which adversely affect as the overall profit and ultimately effect on the interest earned ratio as well. Those SRM Company who can able to roll out money more frequently in business can earn more profit reduce turnover ratio and improve overall financial position. To conclude figures on table 14 shows that the entire ratios of are progressive and in year 2006 which result better positioning than industry average which represent the strong financial improvement over year 2003. From MCNB Prospective Based on the projected ratio analysis, income statement and balance sheet for the year 2006 and 2007, It is justifiable that the bank should extend the existing short-term loans and grant the additional $6,375,000. It is also to note that company also revised policy as follows: 1. Targeting lucrative market area and moving away from traditional agriculture.

2. Full margin pricing,

3. Standard industry credit terms 4. Tighter credit standard

5. Reduction on cost of goods sold. 6. Reduction in administrative and selling expenses and miscellaneous expenses.
As per figures of table 9, 10, 11, 12, 13, 14, even in both projected and revised case. This increased the net income significantly and also improved times earning ratio that is one of the important ratios to pay the interest. However, the debt ratio is still more than 50% but there are significant improvement noted in other ratios except Total Assets Turnover. On the top improvement in current and liquidity ratios indicate

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Ace Institute of Management EMBA Fall 2011

that the company is able to pay its current liabilities with the existing current assets within the year 2006 and 2007. Therefore, taking some measures, bank can rely on the company that the loan will be paid on time.

Remedies and Recommendations

As there is highest probability that MCNB will both extend credit lines and provide extra $6,375,000 loan to support new plan. However for worst situation if bank didnt extend lines, call for immediate repayment. We suggest the following alternative steps, Submit proposal to another bank with its projected financial statement and explain the various measures undertaken by SRMC. Reduce 5% cash balance policy and invest to the business for rolling out the business transaction. Focusing on maintaining full margin pricing, Standard industry credit terms, tighter credit standard

Reduce the size and concentrate on increasing of existing volume by more focusing on marketing reducing cost of goods sold, administrative, selling and miscellaneous expenses.

Conclusion

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Ace Institute of Management EMBA Fall 2011

After all the reviews and analysis of SRM Company financial statements and we have concluded that this company financial position has been falling since 2003 till 2005. So, in order to improve it financial Position Company is willing to undertaken various majors policy of aggressive sales promotion on lucrative market segment and moving away from traditional market area as business strategic measures and should also ensure financial measures as full margin pricing, maintain standard industry credit terms and tighten the credit standards as a financial measures. With these expected changes SRM Company has projected very strong financial statement for next 2 years. With this projected and revised financial statement we can assume that SRM Company will be able to retain back its financial status in the market for the years to come. Lesson learnt Every Organization should keep track and updated with its business environment and should revise its strategic and operation.

Every organization should keep the track and updates with its financial statement on regular basis in order to avoid, revise and control unfavorable suitation. Organization should be able to revise its policy in order to achieve the required goals or target under any circumstances.

Annex -1| Graphical Presentation

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Ace Institute of Management EMBA Fall 2011

Annex -1| Ratio Used:

FINANCIAL RATIOS USED IN THE CASE 1) Current Ratio : 2) Quick Ratio: 3) Debt Ratio: 4) Times interest Earned: 5) Inventory Turnover Ratio(Cost): 6) Inventory Turnover Ratio(Selling): 7) Fixed Asset Turnover: 8) Total Asset Turnover: 9) Average Collection Period: 10) Profit Margin: 11) Gross Profit Margin: 12) Return on Owner's Equity:

Current Asset Current Liabilities Current Asset Inventory Current Liabilities Total Debt Total X 100 % Asset EBIT Interest Expenses Cost of Goods Sold Average Inventory Net Sales Inventory Net Sales Net Fixed Assets Net Sales Total Assets Receivable Net Sales per Day Net Income X 100 % Net Sales Gross ProfitX 100 % Net Sales Net Income X 100 % Common Equity

13)Price Earnings Ratio:

23| Financial Analysis of Silver River Manufacturing Company

Ace Institute of Management EMBA Fall 2011

14)Earnings Per Share:

15)Market Price Per Share (MPS)

16)Dividend Pay Out Ratio

17)Altman Z score, Z = 0.012X1 + 0.014X2 + 0.033X3 + 0.006X4 + 0.999X5

Where,

X1 =

x 100

X2 =

x 100

X3 =

X4 =

X5 = 18) Du-Pont identity Returns on Equity = Total Assets Turnover X Net Profit Margin x Equity Multiplier = x x

24| Financial Analysis of Silver River Manufacturing Company