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Silver River Manufacturing Company

Copyright by R. S. Pradhan

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Silver River Manufacturing Company

Balance sheet Assets 2003 2004 2005 Cash 5,148 4,002 3,906 Receivables 17,098 18,462 29,357* Inventories 18,934 33,029 46,659** Total cur. assets 41,180 55,493 79,922 Gross FA 17,760 20,100 22,874 Less depreciation -2,996 -4,653 -6,694 Net fixed assets 14,764 15,447 16,180 Total assets 55,944 70,940 96,101 Common size (table 4) shows that cash balance reduced from 9% in 2003 to 4% in 2005. Excess cash to shortage position. * Relaxed credit standard. ** Demand decreased.
Copyright by R. S. Pradhan All rights reserved.

Liabilities and Equities 2003 Short-term bank loans 3,188 Accounts payable 6,764 Accruals 3,442 Total current liabilities 13,394 Long-term bank loan 6,375 Mortgage 2,869 Long-term debt 9,244 Total liabilities 22,638 Common stock 23,269 Retained earnings 10,038 Owners' equity 33,307 Total liabilities & equity 55,945 * But not enough. ** Late in paying accounts payable.
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2004 5,100 10,506 5,100 20,706 9,563 2,601 12,164 32,870 23,269 14,801 38,070 70,940

3-3 2005 18,233* 19,998** 7,331 45,562 9,562 2,340 11,902 57,464 23,269 15,368 38,637 96101

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3-4 Income Statement (Year ending December 31) in 000 Rs. 2003 2004 2005 Net Sales 170,997 184,658 195,732 Cost of goods sold 135,268 150,131 166,643 Gross profit 35,729 34,527 29,089 Admn. & selling 12,790 1,5345 16,881 Depreciation 1,594 1,657 2,040 Misc expenses 2,027 3,557 5,725 Total oper.exps. 16,411 20,559 24,646 EBIT 19,318 13,968 4,443 Intt. on STLoan 319 561 1,823 Intt. on LT loan 637 956 956 Intt. on mortgage 260 236 212 EBT 18,102 12,215 1,452 Taxes @ 0.48 8,689 5,863 697 Net income 9,413 6,352 755* Dividends @ 25% 2,353 1,588 189 Addition to RE 7,060 4,764 566
* Reduced price Banks deficiency report shows deteriorating fin. position. Aggressive expansion on the asset side. Signed plant expansion Copyright that by R.requires S. Pradhan $6.375m in the begin. of 2006.All rights reserved. contract

 SRM failed to meet contractual requirement; CR, QR & debt ratio of 2.1,1.0, & 55% respectively. Drastic curtailment of demand. Altman Z factor declined to 2.88 (2005). Likelihood of bankruptcy has increased. Corrective measures: To solve the problem SRM reduced the price aggressively. Followed relaxed credit standard. Results: Inventories started to increase. Receivables increased dramatically.Delay in payment of accounts payable.
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Question (1a): Complete Table 6. Statement of Changes in3 Financial -6 Position (Year Ended Dec. 31) 000 $
Particulars Sources of funds Net income after taxes Depreciation Funds from operations Long-term loan (Change 2004-2003) Net decrease in net wkg cap Total sources Application of funds Mortgage change Fixed assets change (gross) Dividends Net increase in net wkg cap Total uses Analysis of changes in working capital Increase (decrease) in current assets Cash change AR change INV change CA change Increase (decrease) in current liabilities AP change NP change ACC change CL change Net incr. (decr.) in net wkg cap
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2004 6,352 1,657 8,009 3,187 -11,196 268 2,340 1,588 7,001 11,197 2004 -1,145 1,364 14,095 14,314 3,742 1,913 1,658 7,313 7,001

2005

2005

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Question (1b): Complete Table 7: Financial ratios for 2005.3 - 7 Question 2: What are the strengths & weaknesses? Financial ratios 2003 2004 2005 Ind. Comment Liquidity ratio 1. CR, Times* 3.07 2.68 2.5 2. Quick ratio*, Times 1.66 1.08 1 Leverage ratio 3. TD/TA, % 40.46 46.33 50 4. TIE, Times 15.89 7.97 7.7 Asset management or efficiency or turnover ratio 5. Inv turn.(COGS), Times 7.14 4.55 5.7 6. Inv. turn. (sales ), Times 9.03 5.59 7 7. FA turnover, Times 11.58 11.95 12 8. TA turnover, Times 3.06 2.60 3 9. Ave. coll. pd 36.00 35.99 32 Profitability ratio 10.Net profit margin,% 5.5 3.44 2.9 11.Gross profit margin,% 20.89 18.7 18 12. Return on TA, % 16.83 8.95 8.8 13. ROE, % 28.26 16.68 17.5 Z score 6.69 4.75 1.81-2.99 EPS $2.69 $1.81 $0.22 MPS $17.8 $9.7 $1.02 PE, Times 6.6x 5.4x 4.7x * Some of the recs are not collectible. CR & QR are overstated. Copyright by R. S. Pradhan All rights reserved.

Dupont identity: ROE = NI/Sales Firm 2003 = 5.5 Industry 2003= 2.9 Good Firm 2004 = 3.4 Industry 2004= 2.9 Good Firm 2005 = 0.4 Industry 2005= 2.9 Poor

3-8 TA turnover EM=TA/Eq 3.16 1.7 3 2 Good Good 2.6 1.9 3 2 Poor Good 2.1 2.5 3 2 Poor Poor

SRM is deficient in each ROE determinants. Corrective measures: Review pricing policy. Price discounts have not yielded increase in sales to off set discount. Reduce investment in receivables & inventories. Control costs: COGS needs to be decreased.
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3-9 Question 3: Complete tables 9 & 10. (Bank to provide loans & SRM to pay no dividends). Could the bank repay all STLs? First project the following:2005 Net sales COGS (% of sales) Adm & selling exps. $195,732 82.5% 8% of S 80% 7.5% of S 2006Proj 2007Proj

Misc exps
Receivables (IA DSO=32days, sales basis)

1.75% of S 1.25% of S

Inventory
(IA Inv turn=5.7x, COGS basis)
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Table 9: Proforma Income statement 3 - 10 2005 2006 Proj 2007 Proj Net Sales 195,732 Cost of goods sold166,643 Gross profit 29,089 Admn. & selling 16,881 Depreciation 2,040 2,423 1,824 Misc expenses 5,725 Total operating exp 24,646 EBIT 4,443 Interest on STLoan 1,823 3,937 3,937 Interest on LT loan 956 956 956 Interest on mortgage 212 191 172 EBT 1,452 Taxes @ 0.48 697 . Net income 755 Dividends 0.25 189 . Addition to RE 566
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Table 10: Projected Balance Sheet Liabilities and Equities 2005 2006 Proj Cash 3,906 Receivables 29,357 Inventories 46,658 Total current assets 79,921 Land, bldg, plt & eq. 22,874 29,248 Less depreciation -6,694 -9,116 Net fixed assets 16,180 20,132 Total assets 96,101 Assets 2005 2006 Proj Short-term bank loans 18,233 24,608 Accounts payable 19,998 15,995 Accruals 7,331 9,301 Total CL 45,562 49,904 Long-term bank loan 9,562 9,562 Mortgage 2,340 2,104 Long-term debt 11,902 11,666 Total liabilities 57,464 61,570 Common stock 23,269 23,269 Retained earnings 15,368 Owners' equity 38,637 Total liab. and equity 96,101 Min cash bal. rqd: 5% of S $9,787 $10,374 SRM is able / not able to repay all ST loans by 2006?
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2007 Proj . . 30,126 -10,939 19,187 2007 Proj 24,608 16,795 11,626 53,029 9,562 894 11,456 64,485 23,269 . . $11,360
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3 - 12 Question 4: Complete table 11. Project fin. Ratios.

2005 2006Prj 2007Prj Ind. CR Comment 1. CR, x 1.75 1.69 1.85 2.5 2 Poor but improving 2. QR, x 0.73 1.09 1.25 1.0 1 OK 3. TD/TA, % 59.80 58.83 54.98 50.0 55 Poor but improving 4. TIE, Times 1.49 2.69 4.69 7.7 Poor but improving 5. Inv turn.(COGS)3.57 5.70 5.70 5.7 OK 6. Inv. turn.(sales)4.19 6.91 7.13 7.0 OK 7. FA turnover 12.10 10.31 11.84 12.0 OK 8. TA turn. 2.04 1.98 1.94 3 Poor 9. DSO 53.99 32 32 32 OK 10.NPM,% 0.39 2.15 4.27 2.9 OK 11.GPM,% 14.8617.5 20 18 OK 12.ROA, % 0.79 4.26 8.28 8.8 OK 13.ROE, % 1.95 10.34 18.39 17.5 OK Altman z 2.88 3.31 3.98 1.81-2.99 OK Situation is improving but non-payment of div is not good.
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3 - 13 Question 5: Complete tables 12, 13 & 14. (If dividends are paid, could the firm repay all STLs & maintain min cash?) Table 12: Proforma Income Statement 2005 2006Rev. 2007Rev. Net Sales 195,732 Cost of goods sold 166,643 . Gross profit 29,089 Admn. & selling 16,881 Depreciation 2,040 2,422 1,824 Misc expenses 5,725 Total operating exp 24,646 . EBIT 4,443 Interest on STLoan 1,823 1,969 0 Interest on LT loan 956 956 956 Interest on mortgage 212 191 171 EBT 1,452 Taxes @ 0.48 697 . Net income 755 Dividend on stock 0.25 189 . Addition to RE 566 Copyright by R. S. Pradhan All rights reserved.

Table 13: Revised Balance Sheet Liabilities and Equities 2005 2006Rev Cash 3,906 Receivables 29,357 Inventories 46,659 Total current assets 79,921 Land, bldg, plt & eq. 22,874 29,249 Less depreciation -6,694 -9,116 Net fixed assets 16,180 20,132 Total assets 96,101 Assets 2005 2006Rev Short-term bank loans 18,233 zero Accounts payable 19,998 15,995 Accruals 7,331 9,301 Total current liabilities 45,562 49,904 Long-term bank loan 9,563 9,563 Mortgage 2,340 2,104 Long-term debt 11,902 11,666 Total liabilities 57,464 61,570 Common stock 23,269 23,269 Retained earnings 15,368 Owners' equity 38,637 Total liab. and equity 96,101 Min. cash bal.rqd:5% of S. $9,787 $10,374
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2007Rev . . 30,126 -10,939 19,186

. 2007Rev Zero 16,795 11,626 53,029 9,563 1,894 11,456 64,485 23,269 . . $11,360

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Ratios Cmt 1. CR, x 1.75 2. Qk ratio, 0.73 3. TD/TA, % 59.80 4. TIE, Times 1.49 5. Inv turn.(COGS) 3.57 6. Inv. turn. (sales) 4.19 7. FA turnover,x 12.10 8. TA turn. 2.04 9. DSO 53.99 10.NPM,% 0.39 11.GPM 14.86 12.Return on TA 0.79 13. ROE, 1.95 Copyright % by R. S. Pradhan

Table 14: Revised financial ratios 3 - 15 2005 2006Rev 2007Rev IA Cnt req 2.5 2 1.0 1 50.0 55 7.7 5.7 7.0 12.0 3 32 2.9 18.0 8.8 17.5 All rights reserved.

3 - 16 Question 6. On the basis of your analyses, do you think that the bank should: a) extend the existing short- and long-term loans & grant the additional $6,375,000 loan, 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? Question 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? What lessons do we learn from the case?

Thanking you.

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