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Manufacturing Company
A Case Study Analysis
Uniglobe College
GENERAL BACKGROUND 2
4.4.2. INVENTORY TURNOVER RATIO (SALES) 36
4.4.3. FIXED ASSETS TURNOVER RATIO 36
4.4.4. TOTAL ASSETS TURNOVER RATIO 37
4.4.5. AVERAGE COLLECTION PERIOD 38
CONCLUSION 55
Acknowledgements
It's a great pleasure to present this report of case study on “Silver River Manufacturing
Company”. At the beginning, we would like to express our monumental gratitude to our
group members for the initiation till the successful completion of this case.
We are extremely thankful to Prof. Dr. Radhe Shyam Pradhan for extending his
valuable guidance about the analysis of financial statements concerned with this case, and
his support for literature, critical reviews of case and the report.
We would also like to thank our all our group members for their sincere effort and
cooperation throughout the analysis of this case. Above all we would like to thank
everyone for the moral support. We are indebted to all group members for their time &
passion during the case analysis, without such efforts, work could not have been
accomplished on time.
General Background
This case is mainly concerned with Silver River Manufacturing Company (SRM), which
is a US based and whose stock is traded over the counter, is large regional producer of
farm and utility trailers specialized lives stock carriers and mobile home chassis. More
than 85% of SRM’S sales come from the southern part of the United States though a
growing market for customer horse transport vans designed and produced by SRM is
developing nationally as well as internationally. Several major boat companies in Florida
work closely with SRM in designing trailers for their new offerings.
According to this case the SRM is a major client of Marion Country National Bank
(MCNB) but due to the recession that had been plaguing the nation’s farm economy since
2010s caused problem for agriculture for the SRM who depends on farmers for roughly
45 to 50 percent of total sales. SRM whose products are totally based on latest
technology. SRM hold several patents with which it can partially offsets some of the risk.
SRM had experienced high and relatively steady growth in sales, assets and profits in the
decade prior to 2013. Toward the end of 2013, the demand for new field trailers in the
citrus and vegetable industries started to fall off. In this case the white had recently
attended an executive development seminar on market penetration and profitability, he
was convinced with the factors that key to sustained profit and superior market
performance was sales growth and achievement of the high shares of the market. The
recession that had been plaguing the nation’s farm economy and disastrous freezes for
two straight winters resulted in high curtailment of demand for grove retailer and citrus
transport carriers; SRM was not immune to this.
Though SRM had shown high and steady growth in sales, assets and profits prior to 2013,
however, towards the end of 2013 the demand for new field trailers in citrus and
vegetable industries started for fall off. Likewise, SRM in designing trailers for their new
offerings, and these boat-trailer packages are sold through the nationwide dealer networks
of the boat companies. With few exceptions, the products manufactured by SRM 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 of the risks. Marion County National Bank (MCNB) is the official
banker of SRM that has sanctioned short and long term credit facilities.
MCNB considered SRM to be a financially sound and efficiently managed firm until the
symptoms of illness of SRM surfaced. Being a close friend and a well wisher, Ms. Lesa
Nix, Vice President of MCNB, informs Mr. White that the financial health of SRM
worsened from 2014 through 2015 such that MCNB might consider calling back the
credit facilities while SRM has made a commitment to expand its facility requiring an
additional fund of $7,012,500. Mr. White Had planned to obtain this additional money by
a short-term loan from MCNB.
Since, to finance these increase in assets, SRM turned to Marion Country National Bank,
(MCNB) for long term loan in 2014 and increase in its short term credit lines in both
2014 and 2015.MCNB had been a major banker of SRM for a long time. In the start, Lesa
Nix, the vice-president of MCNB, had handled the case of SRM. Later, she got promoted
and was no longer responsible for handling SRM’s account. However, as Mr. White was
a close friend, she still took interest on SRM. Even this was insufficient to cover the
aggressive expansion on the asset side. Consequently, Greg White who always made
prompt payments, started to delay payments.
Moreover, this resulted substantial increase in accounts payable and other short-term
loans. Upon analyzing SRM’s financial conditions, Lesa Nix found that the bank’s
computer analysis system revealed a number of significant adverse trends and highlighted
several potentially serious problems. Its 2015 current, quick and debt ratios failed to meet
the contractual limits of 2,1 and 55 percent respectively. Technically, the bank had a legal
right to call for immediate repayment of both long and short-term loans and if they were
not repaid within ten days then this could force the company into bankruptcy.
Despite such adverse conditions Nix considered the company to have good long run
prospects assuming of course that management reacted immediately and appropriately to
the current situation. Hence, Nix had looked upon the threat of accelerating the loan
repayment primarily as a means to get Greg White’s undivided attention and as well to
force him to think about corrective actions that must be taken to mitigate SRM’s short-
term problems. Even though she hoped to avoid calling the loans if at all possible because
that action would back SRM into a corner from which it might not be able to emerge
intact, Nix realized that the bank’s examiners, due to the recent situation of bank failures
were very sensitive to the issue of loan problems.
SRM’s Altman Z factor (2.88) for 2015 was below 2.99, which indicated that SRM was
likely to get bankrupt in two years. Because of this deficiency, MCNB was under
increased pressure from the regulators to reclassify SRM’s loan as ‘problem category’
and take whatever steps needed to collect the money due and reduce the bank’s exposure
as quickly as practicable. In order to avoid reclassification, SRM required strong and
convincing evidence to prove that its problems were temporary in nature and it had good
chance of reversing the trend.
The current financial problems were not the only problem, which Mr.White faced. He
had recently signed a contract for a plant expansion that would require another
$7,012,500 of the capital during the first quarter of 2016. He had planned to obtain this
money by a short-term loan from MCNB to be repaid from the profit generated in the
first half of 2016. He believed that new facilities would enhance the production
capabilities in a very lucrative area of custom horse van.
The financial position of the company could improve significantly over the next two
years if the bank maintained or even increase the credit lines according to analysis of Mr.
White’s. Once the new facility is goes online, the company would be able to increase
output in rapidly growing and particularly profitable horse van and home chassis segment
of the market and also reduce the dependency on farm and light utility trailer sales to
35% or less. He also projected that the sales growth would be 6% and 9.5% in an average
for 2016 and 2017 respectively, assuming there is no significant improvement in either
national or farm economy.
He also assumed that SRM would change its policy of aggressive marketing and sales
promotion and return to full margin prices, standard industry credit term and tighter credit
standards. These changes would reduce cost of goods sold to 85% in 2015 and 82.5% in
2016 and 80 % in 2017. Similarly administrative and selling expenses are likely to
decrease from 9% to 8% in 2016 and 7.5% in 2017. Also, the miscellaneous expense
would reduce to 1.75% and 1.25% of sales in 2016 and 2017 respectively. Average
collection period and inventory turnover will be maintained at average industry level.
As per the financial data provided in the case and the projected income statement and
balance sheet, we have to analyze whether SRM is eligible to obtain the bank loan. Now,
the question is whether the bank should extend the existing short and long-term loans or
should rather demand immediate repayment of both existing loans. Also we have to
propose alternatives available to SRM if the bank were to decide to withdraw the entire
line of credit and to demand immediate repayment of the two existing loans.
Question 1. (a) Prepare a statement of changes in financial position for 2015
(sources and uses of funds statement) or complete Table 6.
Solution:
Analysis of change in working capital 2014 2015
Increase (decrease) in current assets
Cash change (1260) (107)
Account Receivable change 1501 11985
Inventory change 15505 14992
Current Assets change 15745 26870
Increase (decrease) in current liabilities
Notes payable change 2104 14446
Account payable change 4116 10441
Accruals change 1823 2454
Current liabilities change 8043 27.341
Net increase (decrease) in working
capital 7702 (471)
Question 1. (b) Calculate SRM’s key financial ratios for 2015 and compare them
with those of 2013, 2014, industry average, and contract requirement or complete
Table 7.
Solution:
Liquidity ratio
Leverage ratio
Assets management
ratio
(COGS), Times
Profitability Ratio
Working Notes
Gross Profit Gross Profit/ Sales 31998/215305 14.86
Margin, Percentage
It demonstrates the degree to which current assets are enough to pay current liabilities.
Moreover, it is calculated as following:
Current ratio= Current Assets/Current liabilities
4
3
2
SRM
Company
1 Industry Average
0
2003
2004
2005
We can conclude that the company’s ability to fulfill short-term obligations as current
assets has been decreased. Current ratio of SRM has decreased in 2005 as compared to
2003, 2004 and industry average. i.e. 1.75 < 3.07, 2.68 & 2.50.
1.1.2 Quick ratio
It measures the liquidity position of company and it verifies the ability of payment and
can be shown below on formula:
2
1.5
1
SRM
Company
Industry
Average
0.5
0
2003
2004
2005
Therefore, the quick ratios of SRM’s of 2003, 2004 are high, whereas for 2005 is less
than both years. The industry average is also more than that of quick ratio of SRM
(i.e.73<1.66, 1.08 and 1.00), which indicate the less liquidity position of this company.
70.00%
60.00%
50.00%
40.00%
SRM
Company
30.00%
Industry
Average
20.00%
10.00%
0.00%
2003
2004
2005
In comparison to the industry average, SRM have more possibility than the competitors
where industry average is 50% and that of the SRM are 59.796%. It is clear in the sense
that the debt ratios have been in increasing trend i.e. 40.46%, 46.33% and 59.796% in
year 2003, 2004 and 2005 respectively which simulates the company’s reliance and
leverage in comparison with previous year.
18
16
14
12
10
SRM
Company
8
Industry
Average
6
4
2
0
2003
2004
2005
The time interest ratio acquired is declined from 2003 to 2005 but is not below 1 so it is
still able to meet its interest necessities. So from this we can easily see the decreasing
interest paying limit of volume held of SRM over the years. And in the year 2005 SRM
has decline to continue the ratio as off industry.
8
6
4
SRM
Company
2 Industry Average
0
2003
2004
2005
10
5
SRM
Company
Industry
Average
0
2003
2004
2005
Inventory turnover ratio has decreased from 7.14 to 3.57 times on cost and 9.03 to 5.59
times on sales together in the year between 2003 and 2005, where it shows the company
is not effective in managing the inventory.
12.2
12
11.8
SRM
Company
11.6
Industry
Average
11.4
11.2
2003
2004
2005
The adequate usage of fixed asset has been done by SRM, as the turnover bring out fixed
asset are in increasing trend i.e. from $11.58, to $12.097 in 2003 to 2005. The industry
average is $12 is less than that of Silver River Manufacturing it means the company has
used its fixed assets efficiently.
4
3
2
SRM
Company
Industry
Average
1
0
2003
2004
2005
In 2005, the total asset turnover is $ 2.06, which is less in difference with 2003 (i.e.$
3.06). This indicates the company is not capable to make use of its total asset. As the
industry average is $3, which means SRM is not using its asset effectively to increase the
productivity of the company with consideration to create sales.
60
50
40
30
SRM
Company
20 Industry Average
10
0
2003
2004
2005
This ratio measures the average number of days customers take to pay their bills, which
resemble the effectiveness of credit and selection policies of the business. This ratio
also determines if the credit terms are matter of fact.
Furthermore, in case of SRM it takes 36 days to collect its receivable in 2003, which
increased, to 53.99 in 2005. When compared to the industry average, SRM is less able to
perform of collecting the receivables as compared to industry average.
6
5
4
3
SRM
Company
2 Industry Average
1
0
2003
2004
2005
The profit margin ratio of SRM Company in 2003 is 5.5 and in 2005 is 0.386, which
shows the rapid decrease in profit margin ratio. The industry average is found to be 2.9,
which indicate SRM should obtain lesser profit margin compared with competitors.
1.4.2. Gross Profit Margin (%)
25
20
15
SRM
Company
10
Industry
Average
5
0
2003
2004
2005
The gross profit margin are 20.89% in 2003 to 14.86% in 2005, it shows decreasing
trend. The industry average in term of gross profit margin is 18%, which is more
compared to SRM. Company is unable to make profit by using raw materials, labor and
manufacturing with compared to its competitors.
20
15
10 SRM Company
5 Industry Average
0
2003
2004
2005
The return on assets of SRM has been declining from 16.83% to 0.786% from 2003 to
2005. Compared to industry average of 8.8% other companies are more efficient in
generating profit using its assets. SRM’s return on asset has exceedingly declined from
2003 to 2005 (ie.16.83% to 0.786%) as related to industry average i.e. 8.8%. ROA
indicate the efficiency in generating profit using its asset. Therefore SRM is less effective
in generating profit by using its asset, as compared to compotators.
1.4.4. Return on Owner’s Equity
30
25
20
15
SRM
Company
10
Industry
Average
5
0
2003
2004
2005
Capabilities of generating profit from shareholders money determine the ROE. Return on
equity for SRM is rapidly declining from 2003 to2005, (i.e. 28.26 to 1.95%), industry
average is found to be 17.5%. which indicate SRM is less capable of generating profit
from shareholder money compared to competitors.
Question no. 2.
Based on the case data and the results of your analysis in Question 1, what are the
SRM’s strengths and weaknesses? What are the causes thereof? (Use of the Du Pont
system and Altman Z factor would facilitate analysis and strengthen your answer.)
Solution:
Table 7: Silver River Manufacturing Company
Ratio Analysis Year Ended December 31
Liquidity ratio
2.Quick ratio, times 1.66 1.08 0.73 1.00 Weak
Leverage ratio
Assets management
ratio
(COGS), Times
Profitability Ratio
For 2013
= 3.093
For 2014
X4 = ME / Book Value of Total Debt = 37,405.54/36,156.00 = 1.02 times
= 0.012 (0.4904) +0.014 (0.2086)+0.033 (0.1969) +0.006 (1.02) +0.999 (2.60) = 2.62
For 2015
= 0.012 (0.3575) +0.014 (0.1599)+0.033 (0.0462) +0.006 (0.061) +0.999 (2.04) = 2.04
2.1. Altman Z Factor
Z
Factor
4.00%
3.00%
2.00%
Z
Factor
1.00%
0.00%
2013
2014
2015
For 2013
For 2014
ROE = NPM * TAT * EM
For 2015
ROE
30.00%
20.00%
ROE
10.00%
0.00%
2013
2014
2015
The key aspects discussed are based on the case data and the results of ratio analysis
SRM’s the strengths and weaknesses and the causes thereof are listed below:
Strengths:
• The fixed asset turnover ratio 12.09 in 2015 is increasing. It indicates the number
of times the average fixed assets are turned over during the year of SRM. This
shows that the fixed assets are used effectively.
• SRM’s Altman Z score is compatible with the industry average (i.e. 2.04) against
the industry average of 1.81/2.99). Even though, the factor is compatible with the
industry average, it is not a good sign for the company. The company falls under
gray zone and needs to be more careful about going bankrupt.
Weakness:
• The profitability ratios (Profit Margin, Gross Profit Margin, Return on Total
Assets & Return on owner’s Equity) are in declining from 2013 to 2015. The net
profit margin has drastically reduced from 5.50 to 0.39 and is less than the
industry average. Comparing with the industry average of 2.90, the SRM’s
operating efficiency is very poor considering the competitors in the market.
• The Company is not in a comparatively liquid position. The company has fewer
current assets than the current liabilities thereby showing negative net working
capital. The current ratio and quick ratio also reflect the less liquid position of
SRM.
• The price earnings (PE) ratios are also declining from 6.61 in 2013 to 5.35 in
2014 and finally 4.63 in 2015.
• Earnings per share (EPS) are declining from the year 2013: $2.69 to $1.81 in year
2014 and $0.22 in year 2015.
• Average collection period is higher in 2015, 54 days.
• The firm’s equity multiplier is increasing from 1.68 times in 2013 to 1.86 times in
2014 and finally 2.49 times in 2015.
Question No.3.
If the bank were to maintain the present credit lines and grant an additional
$7,012,500 short-term loan at a 16 percent rate of interest effective from January 1,
2016, would the company be able to retire all short-term loans existing on December
31, 2016? (Assume that all of White’s plans and predictions concerning sales and
expenses materialize. In these calculations cash is the residual balancing figure, and
SRM’s tax rate is 48%. Assume that SRM pays no cash dividends during the year.)
Complete tables 9 and 10 included as worksheets to facilitate analysis.
Miscellaneous expenses 6,297 3994 3124
Table 10: Silver River Manufacturing Company
Pro Forma Balance sheets (Projected)
Worksheet for Year End 2017 (Thousands of Dollars)
Assets
Accumulated depreciation
(7363) (10028) (10939)
Net fixed assets
17798 22145 22199
Liabilities and equities
Working Note:
Calculations
228223.3*
Projected sales 215,305 *1.06 228223 1.095 2,49904
82.5% of 80% of
Cost of goods sold 228223.3 188284 249904.5 1,99923
1.75% of 1.25% of
Miscellaneous expenses 228223.3 3994 249904.5 3124
48% of 48% of
Taxes 9429.23 4,526 20536.24 9857
3.2. Account Receivable
For 2016: Average collection period = Receivables / Sales per day
Notes:
= $(39667 – 27068)
= $12599
= $ 11411.15
From the calculation we can see that the company is able to maintain the minimum cash
balance. Hence, it has enough cash balance to retire the short-term bank loans i.e. SRM
will be able to retire its short term bank loan if the prediction made were materialized.
Question No.4.
Compute projected financial ratios for 2016 and 2017 (or complete Table 11).
Compare these ratios with 2015 along with industry averages and analyze
improvement or deterioration in financial condition.
Solution:
Table 11: Silver River Manufacturing Company
Ratio Analysis Year Ended December 31, 2017 (Projected)
Liquidity ratios
Leverage ratios
Asset management
ratios
COGS/Inventory 3.57 5.70 5.70 5.70
Inventory turnover (cost)
Sales/Inventory 4.19 6.91 7.1 7.00
Inventory turnover
(Selling)
Fixed asset turnover Sales/Net fixed 12.10 10.3 11.26 12.00
assets
Sales/Total assets
Total asset turnover 2.04 1.98 1.94 3.00
Receivables/(annual
Average collection 54.00 32.00 32.00 32.00
sales/360)
period
Profitability ratios
Working Notes:
2016 2017
Times interest earned EBIT / Interest 15022/5593 2.69 26108 /5572 4.69
Fixed assets turnover Sales / Fixed asset 207475.53 / 10.3 227,185.70 / 11.84
20,132.25 19,186.76
Total asset turnover Sales / Total asset 207475.53 / 1.98 227,185.70 / 1.94
104,664.12 117,287.76
4.1. Liquidity Ratios
4.1.1. Current Ratio
3
2.5
2
1.5
SRM
Company
1 Industry Average
0.5
0
2015
2016
2017
In 2016, the projected current ratio is lower than 2015 and Industry average. This shows
that the firm’s ability to meet its short term obligations has decreased in 2016. In 2017,
the projected current ratio is quite higher than 2015 and lower than the industry average.
This shows that the firm’s ability to meet its short term obligations has improved but is
still poor in comparison to industry average.
1.5
1
SRM
Company
0.5
Industry
Average
0
2015
2016
2017
In 2016, the projected quick ratio is higher than 2015 and industry average. This shows
that the ability of firm to meet its short term obligations has improved. In 2017, the
projected quick ratio is quite higher than 2015 and industry average. This shows that the
firm has improved its ability to meet its short term obligations.
62
60
58
56
54
SRM
Company
52
50
Industry
Average
48
46
44
2015
2016
2017
In 2016, the projected debt ratio is lower than 2015 and quite higher than industry
average. This shows that company has decreased its assets which is financing from debts
but it is quite higher in comparison to industry average. In 2017, the projected debt ratio
has decreased than 2015 and also higher than industrial average. The debt ratio indicates
that the company has minimized its risk level.
4.3. Time Interest Earned Ratio
10
8
6
SRM
Company
4
Industry
Average
2
0
2015
2016
2017
In 2016 the time interest earned ratio has increased than 2015 and is lower than the
industry average. This shows that the company is still unable to cover the interest
expenses. In 2017, the ratio is improved but still below the industrial average line which
shows the improvement in ability to cover the necessary interest expenses.
6
5
4
3
SRM
Company
2 Industry Average
1
0
2015
2016
2017
Inventory turnover ratio has been improved in the years 2016 and 2017 then in 2015 and
is equal to industrial average. From this we can conclude that the company’s inventory
are producing sales as that industry average.
8
6
4
SRM
Company
Industry
Average
2
0
2015
2016
2017
In 2016, there has been increase in inventory turnover ratio (in costs) in comparison to
2015 and is above the industry average. In 2017, this ratio is higher than 2015 but is
below the industry average showing deterioration in the company’s capacity in efficiently
managing the inventory.
If we analyze the inventory turnover in terms of sales we see in both the years 2016 and
2017 there have been significant improvement in inventory turnover in comparison to the
year 2015 and both the years have inventory turnover equal to that of industry average.
However, a better measure of inventory turnover is the inventory turnover in terms of
cost rather than in terms of sales.
12.5
12
11.5
11
SRM
Company
10.5
10
Industry
Average
9.5
9
2015
2016
2017
The fixed assets turnover ratio in2016is low in comparison to that of the year 2015 and
industry average. However, there is some progress in utilization of fixed assets in the year
2017 but it is still below in comparison to 2015 and industry average.
4
3
2
SRM
Company
Industry
Average
1
0
2015
2016
2017
The total assets turnover ratios in the year 2016 and 2017 are lower in comparison to the
year 2015 and industry average. This ratio in the year 2015, 2016 and 2017 shows the
decreasing trend. This ratio is below the industry average line.
4.4.5. Average Collection Period
60
50
40
30
SRM
Company
20 Industry Average
10
0
2015
2016
2017
In year 2016 and 2017 average collection period is equal to industry average. The firm is
projected to have sufficient improvement in Average collection period in comparison to
2015.
5
4
3
SRM
Company
2
Industry
Average
1
0
2015
2016
2017
In 2016, the projected profit margin has improved in comparison to the year 2015 but is
still below the industry average. However, in the year 2017 the projected profit margin
has improved and is higher than industry average. This shows that there will be
improvement in financial condition of the company in the year 2017.
25
20
15
SRM
Company
10
Industry
Average
5
0
2015
2016
2017
In year 2016 and 2017 the projected gross profit margin has increased in comparison to
2015. In 2016 it is below industry average but in 2017 it is above industry average
showing the improvement in financial condition.
10
8
6
SRM
Company
4
Industry
Average
2
0
2015
2016
2017
Return on assets is also been increased in the year 2016 and 2017 from 2015. In the year
2016 and 2017 SRM has failed to maintain the industry average but it has improved
dramatically in the year 2017 and has able to maintain better return that of industry. Even
With the increase in ROA which is a good sign of progress.
20
15
10
SRM
Company
Industry
Average
5
0
2015
2016
2017
In 2016, there has been great improvement in ROE in comparison to the year 2015 but is
still below the industry average. But, in 2017 it is above the industry average showing the
improvement in both operating and financial decisions of the company.
Question No.5.
If all short-term bank loans are repaid towards the end of the first half of 2016, do
you think that company is still able to pay regular dividends and maintain minimum
cash balance? Revise the tables 9, 10, 11 (or complete the tables 12, 13 and 14). Do
you find any situations developing that may indicate poor financial policy? What
should be the impact of such situations on the ratios for the company, and are such
impacts necessarily either good or bad? Why?
Solution: If all the short-term loans were repaid at the end of first half of 2016, the
company would be able to pay its regular dividends in 2016 as well as in 2017. This is
because the interest on short-term loan is being decreased in 2016 and is being zero by
2017.
The minimum cash balance required at the end of 2016 is 11411.165 (5% of 228223.3).
The company after paying the dividend of 25% during the year 2016 has the cash balance
of $10125440. So, the company will not be able to maintain the minimum cash balance
of $10387276.
Since, after the payment of short-term loan all the ratios of the company are improving.
We can find that there is no any situation that indicates poor financial status.
The impacts on the ratios after the payment of short-term bank loans are:
Liquidity ratios
a. Current ratio: The improvement in the current ratios of the company shows better
ability of the company to meet its current obligations.
b. Quick ratio: The improvement in quick ratio of the company shows better ability
to meet its short term obligations.
Leverage ratios
a. Debt ratio: The decrease in debt ratio of the company shows its less involvement
of debt to finance fixed assets of the company.
b. Time’s interest earned ratio: The improvement in the Time interest earned ratio
shows is ability to pay interest.
a. Total asset turnover: The increase in total asset turnover ratios shows the company
has more efficiently utilized the overall assets to generate more sales revenue.
Profitability ratios
a. Profit margin: The increase in the profit margin ratio shows the improvement in the
company’s ability to earn by its sale after paying all the necessary expenses.
b. Return on total assets: The improvement in return on total assets ratio shows the
good effectiveness of the operating management of the firm.
c. Return on owner’s equity: The increase in return on owners’ equity shows the
improvement in both operating and financial decisions of the company.
Net income before tax 1597 11595 24867.3
2016
Particulars 2015 Revised 2017 Revised
Assets
Liabilities and Equities
Working Notes:
Administrative
and selling
expenses 8% of 228223.3 18258.76 7.5% of 249904.5 18743
Miscellaneous 1.75% of 1.25% of
expenses 228223.3 3,993.9 249904.5 3123.81
Working Notes:
Particulars
2016 2017
Retained Additions in Total Retained Additions in Total
earnings 2016 earnings 2017
(2015) (2016)
Retained 16904 4522 21426 21426 9770 31196
Earnings
Notes:
2016
Particulars 2015 Revised 2017 Revised Industry average
Liquidity Ratios
Leverage Ratios
Profitability Ratios
Inventory
turnover(cost) 3.57 5.70 5.70 5.70 5.70
Inventory
turnover(selling) 4.20 6.9 6.91 7.1 7.13
Average collection
period 54 32 32 32 32
margin (%)
Return on owner's
equity 1.96 10.34 12.82 18.38 22.91
1. Liquidity ratio
Since all short term loans would have been met by the end of 2016, current and quick
ratios would increase. It shows the company’s ability to meet its short term obligation
in coming year will be better.
2. Leverage ratio
Debt ratio has declined as we can see in the trend above which reduces the risk of
bank as there would be lower debt in comparison to assets. With new policy, SRM
will have 46.37% of debt financing in 2016 as compared to previous 58.83%.
Similarly in 2007, SRM will have 54.98% of debt financing and after the repayment
the SRM will have 43.61%.
3. Profitability ratio
Profit margin has also increased as income is in an increasing trend with decrease in
interest expenses. The return from the total assets of SRM will be improved after the
repayment of all loans. The profit generated from shareholders equity will also be
improved if all the short-term loans are repaid. As major ratios would have been
improved by implementing new policy of repayment of short term loan by 2016,
financial situation of the company would be better off.
Working Notes:
Computation
Particulars Formula 2016 2017
Current assets/
current
Current ratio liabilities 65535 / 27826 2.35 79552/ 31263 2.54
(Current
assets -
inventories)
Current (65535-33032) / (79552-35074)/
Quick ratio liabilities 27826 1.16 31263 1.42
Total debt /
Debt ratio(%) Total asset 40658 / 87680 46 43865 / 100657 43.57
EBIT /
Times interest earned Interest 15022 / 3427 4.38 26292 / 5572 21.19
COGS /
Inventory turnover(cost) Inventory 188284 / 33032 5.70 199923 / 35074 5.70
Sales /
Inventory turnover(selling) Inventory 228223 / 33032 6.90 249904 / 35074 7.12
Sales / Fixed
Fixed assets turnover asset 228223 / 22145 10.3 249904 / 21105 11.84
Sales / Total
Total asset turnover asset 228223/ 87680 2.6 249904 / 100657 2.48
(Net income /
Profit margin (%) Sales) * 100 (6030/228223)*100 2.64 (13027/249904)*100 5.21
(Net income /
Total asset) * (13027 /
Return on total assets(%) 100 (6030 / 87680)*100 6.87 100657)*100 12.94
(Net income /
Return on owner's Total equity) *
equity(%) 100 (6030 / 47022)*100 12.82 (13027/ 56792)*100 22.94
Question No. 6:
On the basis of your analyses, do you think that the bank should:
a) Extend the existing short and long-term loans and grant the additional
$7,012,500 loans, or
b) Extend the existing short and long-term loans without granting the
additional loan, or
c) Demand immediate repayment of both existing loans?
If you favor (a) or (b) above, what conditions (collateral, guarantees, or other
safeguards) should the bank impose to protect itself on the loans?
According to our analysis, we found that it would be beneficial for both the bank and the
company, if the bank extends the existing short and long term loans and grant the
additional $7,012,500 loans. We have following reasons to support our recommendation:
2. The current problems faced by SRM are not solely because of its operational
failure. Rather, it is due to unavoidable circumstances like financial downturn
(recession) in the market and the unexpected change in the climatic conditions
that reduced the demand of its products in the market.
3. SRM is also committed to repaying its loan. Further, Mr. White had signed a
contract for a plant expansion. The company has jumped into mobile chassis
which is beneficial area. Shifting from policy of aggressive marketing and
sales promotion to full margin prices, standard industry credit term and tighter
credit standard would reduce the cost of goods sold. Likewise, he is also
planning to minimize administrative and selling expenses and miscellaneous
expenses in the coming two years which shows the company financial
position might improve significantly over the next two years.
4. SRM has made the planning for the market penetration. So, there is a project
growth rate of 6% & 9.5% in sales on an average for 2016 & 2017
respectively, assuming there is no significant improvement in either national
or industry economy. This condition is also likely to strengthen their chance
of making the debt payment.
5. The company is also likely to enter in the horse van and mobile chassis
segments of the market that are rapidly growing with significant profit
prospective. Such an investment is likely to reduce the dependency of the
company on farm and light utility trailer segment that is presently causing the
firm’s poor performance.
6. Assuming that the projected ratios hold true in future, these ratios exceed the
contractual requirement of the bank as it is very possible that SRM will
eventually succeed in fulfilling its financial obligations.
7. SRM’s projected Altman Z-Score for the year 2016 & 2017 is above 3,which
shows the less chances of company going bankrupt in future.
On the basis of our analysis we can assured that if SRM will undertake new facilities then
within two years period SRM will be able to generate enough profit to meet the entire
obligation owned to the bank. Another reason is that the company has a growth prospect
and sound projected financial figures the bank should not break the relationship with the
company due to the temporary problems faced by the company. And according to the
condition of SRM we can find that they seems quite able to repay their short term loan.
Question No.7:
If the bank decides to withdraw the entire line of credit and to demand immediate
repayment of the two existing loans, what alternatives would be open to SRM?
Though SRM had shown high and steady growth in sales, assets and profits prior to 2013,
however, towards the end of 2013 the demand for new field trailers in citrus and
vegetable industries started to fall. In order to sustain profits and superior market
performance Mr. White aggressively reduced prices to stimulate further sales.
Consequently, production continued unabated and inventories started increasing.
Mr. White’s next step was to relax credit terms and standard to maintain preciously high
growth and to reduce the ever expanding inventory. This effort of Mr. White increased
sales through the third quarter of 2015, but inventories also increased steadily and
particularly short-term credits and accounts receivable grew up dramatically.
If the bank decides to withdraw the entire line of credit & demanded immediate
repayment of the two existing loans i.e. short term loans & long term loans, SRM might
make following decision to repay bank loan.
1. Sales of Fixed Assets – SRM can sale its ideal fixed assets to generate cash
which could be used to repay certain portion of bank loan.
2. Issue of Share Capital – SRM can issue additional number of equity share to
generate cash from general public which could be used to repay long term &
Short term loan.
3. Issue of Bond – SRM has the right to collect cash form general public in the
form of bond with fixed interest rate which could be paid at the end of every
year.
4. Liquidate the Inventory & Sell Account Receivable – Balance sheet of SRM
has accounts receivables of $ 29356.86 and inventory worth $ 46658.62. It
can sell its receivables and liquidate the inventory in order to repay the loan.
5. Use of Cash Balance - SRM company could use cash in its cash balance to
repay certain amount of bank loan.
6. Cut off dividend - SRM can decide to freeze the cash dividend payable to
shareholder for certain period and such amount could be used to repay the
bank loan.
According to our analysis, SRM has to take immediate actions as well as appropriate
steps to stabilize its condition. It can mix the above mentioned actions as a response to
the bank’s decision of withdrawing entire line of credit and demanding immediate
repayment of existing loans.
Question No.8:
by the company, Lesa Nix; Vice-president of MCNB had made a alerting phone call to
the Greg White, founder and president of SRM.
After analyzing the case of SRM, we are able to analyze and interpret the financial ratio
of the company and compare such ratio’s with industry average which helps to know the
financial position and performance of the company that enables management to make
financial decisions. Like ;to compute and analyze Du Pont, to know whether the company
is likelihood of bankruptcy with the help of Altman Z-Score, to prepare the Balance
Sheet of the company to know the financial position of the company, to prepare Income
Statement of the company to know the financial performance in a certain year,to compare
the ratio’s obtained from Income Statement and Balance Sheet with industry average,to
decide whether or not a company is eligible for loan, to decide whether or not, a company
should distribute cash dividend in a certain year.
Moreover to prepare projected Balance Sheet and Income Statement of the company,
how to make immediate repayment of the bank loan with the help by analyzing various
alternatives, to identify strength and weakness of the company with the help of Du Pont
System, to know whether the company can maintain minimum cash balance after
repaying the short-term and long-term loan, to make complex financial decisions and to
identify and solve the problem in policies such as changing aggressive marketing and
sales proportion strategy to full-margin pricing, standard industry credit terms and tighter
credit standards.
Conclusion
Silver River Manufacturing Company (SRM) is U.S based, whose stock is traded over
the counter, and is large regional producer of farm and utility trailers specialized lives
stock carriers and mobile home chassis. More than 85% of SRM’S sales come from the
southern part of the United States though a growing market for customer horse transport
vans designed and produced by SRM is developing nationally as well as internationally.
This company has been a good customer of Marion country National Bank (MCNB)
however, due to inability to meet the contractual financial ratio by the company, Lesa
Nix; Vice-president of MCNB had made an alerting phone call to the Greg White,
founder and president of SRM.
The past performance of SRM had been recognized to be effective, because SRM pays
due amount within the due time which reflects the good reputation in the market and
considered the SRM company to have good long run prospect. And The current problems
faced by SRM are not solely because of its operational failure. Rather, it is due to
unavoidable circumstances like financial downturn (recession) in the market and the
unexpected change in the climatic conditions that reduced the demand of its products in
the market. SRM is also committed to repaying its loan.
Further, Mr. White had signed a contract for a plant expansion. The company has jumped
into mobile chassis, which is beneficial area. Shifting from policy of aggressive
marketing and sales promotion to full margin prices, standard industry credit term and
tighter credit standard would reduce the cost of goods sold. Likewise, he is also planning
to minimize administrative and selling expenses and miscellaneous expenses in the
coming two years, which shows the company financial position might improve
significantly over the next two years.
This study examines the relationship between corporate governance and firm
performance in Nepal’s banking sector. It shows that Return on equity and return on
assets are negatively relative to board size and number of executive directors. There is
also a negative relation of NPLs with board size, the number of independent directors and
number of board meetings and return on equity is positively related to leverage, number
of independent directors and number of board meetings.
There is also positive relation of return on assets with leverage, number of independent
directors, and number of board meetings. And the alternatives of SRM are; take
mortgaged loan from bank, sales accounts receivable and liquidate inventory, make strict
collection policies, Immediate action as well as gradual step to stabilize its condition,
stop payment of dividend payment and delay its trade payable.
Financial ratio used in case
Current Asset
1) Current Ratio :
Current Liabilities
EBIT
4) Times interest Earned:
Interest Expenses
Net Sales
6) Inventory Turnover Ratio(Selling):
Inventory
Net Sales
7) Fixed Asset Turnover:
Net Fixed Assets
Net Sales
8) Total Asset Turnover:
Total Assets
Receivable
9) Average Collection Period:
Net Sales per Day
Net Income
10) Profit Margin: X 100 %
Net Sales
Gross Profit
11) Gross Profit Margin: X 100 %
Net Sales
Net Income
12) Return on Owner's Equity: X 100 %
Common Equity
𝐌𝐚𝐫𝐤𝐞𝐭𝐏𝐫𝐢𝐜𝐞𝑷𝒆𝒓𝐬𝐡𝐚𝐫𝐞 𝐌𝐏𝐒
13) Price Earnings Ratio:
𝐄𝐚𝐫𝐧𝐢𝐧𝐠𝐬𝐏𝐞𝐫𝐒𝐡𝐚𝐫𝐞 𝐄𝐏𝐒
𝑵𝒆𝒕 𝑰𝒏𝒄𝒐𝒎𝒆
14) Earnings Per Share:
𝑵𝒐.𝒐𝒇 𝑪𝒐𝒎𝒎𝒐𝒏 𝑺𝒉𝒂𝒓𝒆𝒔 𝑶𝒖𝒕𝒔𝒕𝒂𝒏𝒅𝒊𝒏𝒈
𝑹𝒆𝒕𝒂𝒊𝒏𝒆𝒅 𝑬𝒂𝒓𝒏𝒊𝒏𝒈𝒔
X2 = x 100
𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔
𝑬𝒂𝒓𝒏𝒊𝒏𝒈𝒔 𝑩𝒆𝒇𝒐𝒓𝒆 𝑰𝒏𝒕𝒆𝒓𝒆𝒔𝒕 𝒂𝒏𝒅 𝑻𝒂𝒙 (𝑬𝑩𝑰𝑻)
X3 =
𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔
𝑵𝒆𝒕 𝑺𝒂𝒍𝒆𝒔
X5 =
𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔
18) Du-Pont identity
Returns on Equity = Total Assets Turnover X Net Profit Margin x Equity
Multiplier
𝑵𝒆𝒕 𝑺𝒂𝒍𝒆𝒔 𝑵𝒆𝒕 𝑰𝒏𝒄𝒐𝒎𝒆 𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔
= x x
𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔 𝑵𝒆𝒕 𝑺𝒂𝒍𝒆𝒔 𝑶𝒘𝒏𝒆𝒓𝒔 𝑬𝒒𝒖𝒊𝒕𝒚