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FINANCIAL ANALYSIS OF
Contents:
Introduction Matter of Concern Statement of Changes in financial position for 2005 SRMCs strengths and Weaknesses Projection of financial statements for 2006 & 2007 under certain assumption Projected financial ratios for 2006 & 2007 Revision of financial statements for 2006 & 2007 under certain assumption What would be the Banks Decision now? If the withdraws its credit and asks for the repayment Conclusion
Introduction
Silver River manufacturing company (SRM) is a large listed regional producer headed
mobile home chassis. The existing major markets are the farmers and boat companies.
More than 85% of SRMs sales come from the southeastern part of the US. It also has a
growing market for custom horse transport vans which is developing nationally and internationally. Likewise, several major boat companies in Florida work closely with 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.
SRMs 45 to 50 % sales depend on farmers.
Matter of Concern
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 2004 through 2005 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 $6.375 million. Mr. White had planned to obtain this additional money by a short term loan from MCNB. Towards the end of 2003, the demand for new field trailers in the citrus and vegetable industries started to fall. This was due to the severe freezes for three years in a row. Although the effect was temporary, the adverse conditions affected the performance of SRM such that they were on the verge of bankruptcy. And the effect was seen with the decline in Market price of the stock of SRM.
Silver River Manufacturing Company Statement of Changes in Financial Position Year Ended December 31 (Thousands of Dollars) 2004 2005 6,351.70 1,657.50 8,009.20 3,187.50 11,196.70 755.02 2,040.00 2,795.02 428.26 3,223.28
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 Mortgage change Fixed assets change Dividends on stock Net increase in working capital Total uses
Silver River Manufacturing Company Statement of Changes in Financial Position Year Ended December 31 (Thousands of Dollars) 2004 2005
Particulars
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
Silver River Manufacturing Company Ratio Analysis Year Ended December 31 Industry Average Remarks 2005
2003
2004
2005
Current ratio
Quick ratio Leverage ratios Debt ratio(%) Times interest earned Asset management ratios
3.07
1.66
2.68
1.08
1.75
0.73
2.50
1.00
Poor
Poor
40.46 15.89
46.33 7.97
59.80 1.49
50.00 7.70
Poor Poor
7.14
4.55
3.57
5.70
Poor
Silver River Manufacturing Company Ratio Analysis Year Ended December 31 Industry Average Remarks 2005
Particulars
2003
2004
2005
9.03
11.58 3.06 36.00
5.59
11.95 2.06 35.99
4.19
12.10 2.04 53.99
7.00
12.00 3.00 32.00
Poor
Ok Poor Poor
2.90 Very Poor 18.00 Poor 8.80 Very Poor 17.50 Very Poor
2003
2004
2005
Industry Average
Remarks 2005
4.75 2005
2.88
5.5
3.06 1.68 28.27
3.44
2.6 1.86 16.64
0.39
2.04 2.49 1.98
Poor
Poor Risky
17.50 Unsatisfactory
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: Inventory Turnover Ratio for 2005 is lower than the Industrial Average as well 2003 and 2004. This indicates that SRMC takes longer time to convert the raw material to Fixed Assets. Also, 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 worried about. Profit Margin, ROA and ROE are significantly low. These ratios indicates 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.
Based on the comparison of different ratios, we found that the situation is not favorable. Therefore industry 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.
Altman Z-Factor: The Altman Z-Factor for 2003 and 2004 were 6.69 and 4.75 respectively which indicated the strong financial position of the SRMC. However, the Altman Z-Factor for 2005 became 2.88 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. Du-Pont: Du-Pont is a famous way of decomposing Return on Equity (ROE) into its 3 components i.e. Profitability Margin, Return on Assets (ROA) and Equity Multiplier. Du-Pont Analysis in this case indicates that the SRMC should focus to increase sales, reduce its expenses and maintain the price of the goods to increase profit margin.
Projection of financial statements for 2006 & 2007 under certain assumptions
Assumptions: Bank maintains the present credit lines and grant an additional $6,375,000 short-term loan at 16 percent rate of interest effective from January 1, 2006 Mr. Whites 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 2007 Remarks
9.50% of previous year sales 80% of sales 7.50% of sales 1.25% of sales 32 days par with industry average
5.7 times 5.7 times par with industry average 5.5 16% 48% 6.5 16% 48%
Silver River Manufacturing Company Pro Forma Income Statements (Projected) Worksheet for Year End 2007 (Thousands of Dollars) Particulars 2005 2006 Projected 2007 Projected 195,731.63 207,475.53 227,185.71 166,642.58 171,167.31 181,748.57 29,089.05 36,308.22 45,437.14 16,880.96 16,598.04 17,038.93 2,040.00 2,422.50 1,823.00 5,724.72 3,630.82 2,839.82 24,645.68 22,651.36 21,701.75 4,443.37 13,656.86 23,735.39 1,823.25 3,937.20 3,937.20 956.25 956.25 956.25 211.90 190.54 171.52 1,451.97 8,572.87 18,670.42 696.95 4,114.98 8,961.80 755.02 4,457.89 9,708.62 188.76 566.26 4,457.89 9,708.62
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
Silver River Manufacturing Company Pro Forma Balance Sheets (Projected) Worksheet for Year End 2007 (Thousands of Dollars) 2007 Projected
Particulars
Assets Cash Account Receivable Inventory Current assets Land, Building, Plant and Equipment Accumulated depreciation Net fixed assets
2005
2006 Projected
Total assets
96,101.00
104,664.12
117,287.76
Silver River Manufacturing Company Pro Forma Balance Sheets (Projected) Worksheet for Year End 2007 (Thousands of Dollars) Particulars 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 2005 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 2006 Projected 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 2007 Projected 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
Analysis:
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)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 2005 1.75 0.73 59.80 1.49 3.57 4.19 12.10 2.04 53.99 0.39 14.86 0.79 1.95 2006 Projected 1.69 1.09 58.83 2.69 5.70 6.91 10.31 1.98 32.00 2.15 17.50 4.26 10.34 2007 Projected 1.85 1.25 54.98 4.69 5.70 7.12 11.84 1.94 32.00 4.27 20.00 8.28 18.39 Industry Average 2.50 1.00 50.00 7.70 5.70 7.00 12.00 3.00 32.00 2.90 18.00 8.80 17.50
Analysis:
Revision of projected financial statements for 2006 & 2007 under certain assumptions
Assumptions: All short-term bank loans are repaid towards the end of the first half of 2006. Mr. Whites 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 2007 Remarks
9.50% of previous year sales 80% of sales 7.50% of sales 1.25% of sales 32 days par with industry average
5.7 times 5.7 times par with industry average 5.5 16% 48% 6.5 16% 48%
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 2006 Revised 2007 Revised 195,731.63 207,475.53 227,185.71 166,642.58 171,167.31 181,748.57 29,089.05 36,308.22 45,437.14 16,880.96 16,598.04 17,038.93 2,040.00 2,422.50 1,823.00 5,724.72 3,630.82 2,839.82 24,645.68 22,651.36 21,701.75 4,443.37 13,656.86 23,735.39 1,823.25 1,968.20 956.25 956.25 956.25 211.90 190.54 171.52 1,451.97 10,541.87 22,607.62 696.95 5,060.10 10,851.66 755.02 5,481.77 11,755.96 188.76 1,370.44 2,938.99 566.26 4,111.33 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
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
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
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
Silver River Manufacturing Company Pro Forma Balance Sheets (Revised) Worksheet for Year End 2007 (Thousands of Dollars)
Particulars Liabilities and equities Short-term bank loans Account Payable Accruals Current liabilities Long-term bank loans Mortgage Long-term debt Total liabilities Common stock Retained earnings Owners' equity Total Capital
2005
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
2006 Revised
15,994.88 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
2007 Revised
16,794.62 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 2005 1.75 0.73 59.80 1.49 3.57 4.19 12.10 2.04 53.99 0.39 14.86 0.79 1.95
2006 Revised
2.36 1.17 46.37 4.38 5.70 6.91 10.31 2.60 32.00 2.64 17.50 6.88 12.82
2007 Revised
2.54 1.42 43.61 21.05 5.70 7.12 11.84 2.48 32.00 5.17 20.00 12.86 22.80
Industry Average
2.50 1.00 50.00 7.70 5.70 7.00 12.00 3.00 32.00 2.90 18.00 8.80 17.50
Analysis:
If the bank withdraws the line of credit and asks for the repayment of the loans
3.50
3.00
2.50
2.00
1.00
0.50
2003 2004 2005 2006 Projected2007 Projected 2006 Revised 2007 Revised Industry Average
70.00
60.00
50.00
40.00
20.00
10.00
2003 2004 2005 2006 Projected 2007 Projected 2006 Revised2007 Revised Industry Average
60.00
50.00
40.00
Inventory turnover (Cost)a 30.00 Inventory turnover (Selling)b Fixes assets turnover
10.00
2003 2004 2005 2006 Projected 2007 Projected 2006 Revised 2007 Revised Industry Average
30.00
25.00
20.00
Profit margin (%) 15.00 Gross profit margin (%) Return on total assets Return on owners equity
10.00
5.00
2003 2004 2005 2006 Projected 2007 Projected 2006 Revised2007 Revised Industry Average
70.00
60.00
50.00
40.00
Times interest earned Inventory turnover (Cost)a Inventory turnover (Selling)b Fixes assets turnover
30.00
Total asset turnover Average collection period Profit margin (%) Gross profit margin (%)
20.00
10.00
2003 2004 2005 2006 Projected 2007 Projected 2006 Revised 2007 Revised Industry Average
Conclusion
43