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A CASE PRESENTATION ON SILVER

RIVER MANUFACTURING COMPANY

Presented by: Presented to:


Rabeena Mali
Pro. Dr. Radhe Shyam
Radha Sharma
Pradhan
Rita Karki
Roma Lamsal
Riya Dhami
Rajesh Jha
Ramesh Nath
Roshan Dutta Chataut
1.(a) Prepare a statement of changes in financial position for 2005 (
sources and uses of funds statement) or complete Table 6.

Particulars 2004 2005


Sources of funds
Net income after taxes 6987 831
Depreciation 1823 2244
Funds from operations 8810 3075
Long-term loan 3506 -
Net decrease in working capital
Total sources 12316 3075
Application of funds
Mortgage change 293 287
Fixed assets change 2574 3051
Dividend on stock 1747 208
Net increase in working capital 7702 (471)
Total uses 12316 3075
Analysis of change in working capital
Increase (decrease) in current assets
Cash Change (1260) (107)
AR Change 1501 11985
INV change 15505 14992
CA change 15745 26870
Increase (decrease) in current liabilities
AP change 2104 14446
NP change 4116 10441
ACC change 1823 2454
CL change 8043 27341
Net increase (decrease) in working capital 7702 (471)
1 (b) Calculate SRM's key financial ratios for 2005 and compare them with
those of 2003,2004, industrial average, and contract requirement or
complete Table 7.
Particulars 2003 2004 2005 Industry average

Liquidity ratios
Current ratio 3.07 2.68 1.75 2.5
Quick ratio 1.66 1.08 0.73 1.0
Leverage ratios
Debt ratio (%) 40.46 46.33 59.80 50.00
Times interest earned 15.89 7.97 1.48 7.70
Asset management ratios
Inventory turnover(cost) 7.14 4.55 3.57 5.70
Inventory turnover (selling) 9.03 5.59 4.19 7.00
Fixed assets turnover 11.58 11.95 12.09 12.00
Total assets turnover 3.06 2.60 2.03 3.00
Average collection period 36.00 35.99 53.99 32.00
Profitability ratios
Profit margin (%) 5.5 3.44 0.39 2.90
Gross profit margin (%) 20.89 18.70 14.86 18.00
Return on total assets 16.83 8.95 0.78 8.80
Return on owners' equity 28.26 16.68 1.96 17.50
Potential failure indicator
Altman Z factor 3.0893 2.622 2.043 1.81/2.99
Current ratio and quick ratio has decreased in 2005 as compared to 2003, 2004 and industry
average.

Debt ratio represent the company is using more debt in comparison of equity.

Inventory turnover (cost) and (selling ) indicates SRM Company is poor in sales.

Fixed assets turnover means company is effectively utilizing its fixed assets.

Total assets turnover represents the company is not effective to utilize its assets.

Average collection period is higher than industry average ,2003 and 2004.

Profit margin ratio indicates other companies have better profit.

Gross profit margin seems to be declined which represents it is not able to make good profit.

Return on total shows company is not able to generate profit using its assets.

Return on owners equity is not able to generate profit from shareholders fund.

Altman Z factor has decreased in 2005 compared to 2003 2004 and industry average.
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.)

Strengths of SRM

Fixed assets turnover ratio has increased from 2003 to


2005 which means it has effectively used its fixed assets.

The Altman Z factor of 2005 (2.043) is compatible with


the industry average (1.81/2.99).
WEAKNESSES OF SRM

Profitability ratio is in rapidly decreasing trend. Profit margin has been


drastically decreased from 5.5 in 2003 to 3.44 in 2004 and to 0.39 in 2005.

Liquidity ratios like current ratio and quick ratio are in decreasing pattern.
This shows the company is not in the sound liquid position.

Accept of fixed assets turnover , all the assets management ratios are in
decreasing manner. This means SRM is not mobilizing its assets in the
effective manner.

Debt equity ratio in 2005 is 59.80 which is much higher than that of
industry average that is 50. The higher the debt ratio the company will be in
more riskier position.
WORKINGS NOTES FOR ALTMAN Z FACTOR
For 2003
X1= Working capital / Total assets
=30565 / 61539 = 0.497
X2 = Retained earnings / Total assets
=11041/ 61539 = 0.179
X3 = EBIT / Total assets
= 21251 / 61539 = 0.345
X4 = Market value of equity / Book value of total debt
= 68481.58 / 24901 = 2.750
X5 = Sales / Total assets
= 188097 / 61539 = 3.057

Z = 0.012x1 + 0.014x2 + 0.033x3 + 0.006x4 + 0.999x5


= 3.09
CONTD
For 2004
X1= Working capital / Total assets
=38266 / 78034 = 0.490
X2 = Retained earnings / Total assets
= 16282 / 78034 = 0.209
X3 = EBIT / Total assets
= 15364 / 78034 = 0.197
X4 = Market value of equity / Book value of total debt
= 37405.54 / 36516 = 1.024
X5 = Sales / Total assets
= 203124 / 78034 = 2.603

Z = 0.012x1 + 0.014x2 + 0.033x3 + 0.006x4 + 0.999x5


= 2.622
CONTD
For 2005
X1= Working capital / Total assets
=37795 / 105711 = 0.358
X2 = Retained earnings / Total assets
= 16904 / 105711 = 0.159
X3 = EBIT / Total assets
= 4888 / 105711 = 0.046
X4 = Market value of equity / Book value of total debt
= 3852.82 / 63211 = 0.061
X5 = Sales / Total assets
= 215305 / 105711 = 2.037

Z = 0.012x1 + 0.014x2 + 0.033x3 + 0.006x4 + 0.999x5


= 2.043
DU PONT SYSTEM

Particulars ROE = NPM TAT EM

ROE =

2003 28.26 = 5.50 3.06 1.6796

2004 16.68 = 3.44 2.60 1.8634

2005 1.96 = 0.38 2.04 2.4873

Industry 17.50 = 2.90 3.00 2.00


Average
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 EFFECTIVE FROM JANUARY 1,2006, THE
COMPANY BE ABLE TO RETIRE ALL SHORT TERM LOANS
EXISTING ON DECEMBER 31,2006? (ASSUME THAT ALL OF
WHITES PLANS AND PREDICTIONS CONCERNING SALES AND
EXPENSES MATERIALIZE. IN THESE CALCULATIONS CASH IS THE
RESIDUAL BALANCING FIGURE, AND SRMS TAX RATE IS 48
PERCENT. ASSUME THAT SRM PAYS NO CASH DIVIDENDS
DURING THE YEAR.) COMPLETE TABLES 9 AND 10 INCLUDED AS
WORKSHEETS TO FACILITATE ANALYSIS.
Table 9: Silver River Manufacturing Computer
ProFarms Incomes Statement (projected)

Particulars 2005 2006 2007


projected projected
Net sales 215305 228223 249904
Cost of goods sold 183307 188284 199923
Gross profit 31998 39939 49981
Administrative and selling 18569 18258 18743
Depreciation 2244 2665 2006
Miscellaneous expenses 6297 3994 3124
Total operating expenses 27110 24219 23873
EBIT 4888 15022 26108
Interest on short-term loans 2006 4331 4331
Interest on long term loans 1052 1052 1052
Interest on mortgage 233 210 189
Net income before tax 1597 9429 20536
Taxes 767 4526 9857
Net income 831 4903 10679
Dividends on stock 208 - -
Additional on retained Earning 623 4903 10679
Table 10:Silver River Manufacturing Company
Pro Forma Balance Sheets (Projected)
Worksheet for year ended 2007 (thousands of Dollars
Particulars 2005 2006 2007
projected projected
Assets
Cash 4296 39667 49529
Account receivable 32293 20286 22214
Inventory 51324 33032 35014
Current Assets 87913 92985 106816
Land, building, plant and equipment 25161 32173 33139
Accumulated Depreciation (7363) (10028) (10939)
Net fixed assets 17798 (22145) 22199
Total assets 105711 115130 129015

Liabilities and equities


Short term bank loans 20056 27068 27068
Account payable 21998 17594 18474
Accruals 8064 10231 12789
Current Liabilities 50118 54894 58331
Long term bank loans 10519 10519 10519
Mortgage 2574 2314 2083
Long term debt 13092 12833 12602
Total liabilities 63211 67727 70933
Common stock 25596 25596 25596
Retained Earning 16904 21807 32486
Owners' Equity 42500 47403 58082
Total Capital 105711 115130 129015
CONTD

In 2006, the company has total cash balance of 39667


thousands and during the same year the short term
bank loan to be retired is 27068
=$(3966727068)
= $12599
5% of sales is maintain by the company
Minimum cash balance =$(2282230.05)
= $ 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.
)
4. COMPUTE PROJECTED FINANCIAL RATIOS FOR 2006 AND 2007 (OR
COMPLETE TABLE 11). COMPARE THESE RATIOS WITH 2005 ALONG WITH
INDUSTRY AVERAGES AND ANALYZE IMPROVEMENT OR DETERIORATION IN
FINANCIAL CONDITION .
Table 11: Silver River Manufacturing Company
Ratio Analysis Year Ended December 31, 2007 (projected)
Particulars 2005 2006 2007 Industry
projected projected average

Liquidity ratios
Current ratio 1.75 1.69 1.83 2.50
Quick Ratio 0.73 1.09 1.23 1.00
Leverage ratios 59.80 58.83 54.98 50.00
Debt ratio 1.48 2.69 4.68 7.70
Times interest earned 3.57 5.70 5.70 5.70
Assets management ratios 4.19 7.00 7.00 7.00
Inventory turnover (cost) 12.09 10.3 11.24 12.00
Inventory turnover (selling) 2.03 1.98 1.94 3.00
Fixed assets turnover 53.99 32 32 32.00
Total assets turnover 0.39 2.15 4.27 2.90
Average collection period 14.86 17.5 20 18.00
Profitability ratios 0.78 4.26 8.28 8.80
Profit margin 1.96 10.34 18.39 17.50
Gross profit margin
Return on total assets
Return on owners' equity
INTERPRETATION

LIQUIDITY RATIOS

2005
2.5

2006 projected
2

2007 projected
1.5

1 industry average

0.5 Column1

0
current ratio
QUICK RATIOS

1.4

1.2

0.8 2005
2006 projected
2007 projected
0.6
Industry average

0.4

0.2

0
Quick ratio
LIQUIDITY RATIOS

DEBT RATIO

62

60

58

56 2005
2006 projected
54
2007 projected
52 industry average
Column1
50
Column2
48

46

44
debt ratio
TIME INTEREST RATIO

5
4.5
4
3.5
3
2.5
2
1.5 2005
1 2006 projected
0.5 2007 projected
0
times interest ratio
ASSETS MANAGEMENT RATIOS
INVENTORY TURNOVER RATIO (COST)

3
2005
2006 projected
2
2007 projected
1

0
inventory turnover
ratio (cost)
INVENTORY TURNOVER RATIO(SALES)

4 2005
2006 projected
3 2007 projected

0
inventory turnover
ratio (sales)
TOTAL ASSETS TURNOVER RATIO

3.5

2.5

2 2005
2006 projected
2007 projected
1.5
industry average
Column1
1

0.5

0
Total Assets
Turnover
AVERAGE COLLECTION PERIOD

60

50

40

30 2005
2006 projected
2007 projected
20

10

0
Average collection
period
PROFITABILITY RATIOS
PROFIT MARGIN RATIO

4.5

3.5

3
2005
2.5 2006 projected
2007 projected
2
industry average
1.5 Column1

0.5

0
Profit margin
GROSS PROFIT MARGIN

25

20

15
2005
2006 projected
2007 projected
10 industry average
Column1

0
Gross profit
margin
RETURN ON TOTAL ASSETS

10

6
2005

5 2006 projected
2007 projected
4 industry average
Column1
3

0
Return on Total
Assets
RETURN ON OWNERS EQUITY

20

18

16

14

12 2005

10 2006 projected
2007 projected
8 industry average

6 Column1

0
Return on owner's
equity
5. IF ALL SHORT TERM BANK LOANS ARE REPAID TOWARDS THE
END OF THE FIRST HALF OF 2006, DO YOU THINK THAT COMPANY
IS STILL ABLE TO PAY REGULAR DIVIDEND AND MAINTAIN
MINIMUM CASH BALANCE. REVISE THE TABLES 9,10 AND 11 (OR
COMPLETE THE TABLES 12,13 AND 14). DO YOU FIND ANY
SITUATIONS DEVELOPING THAT MANY INDICATE POOR
FINANCIAL POLICY? WHAT WOULD BE THE IMPACT OF SUCH
SITUATIONS ON THE RATIOS FOR THE COMPANY, AND ARE SUCH
IMPACTS NECESSARILY EITHER GOOD OR BAD? WHY?
Table no 12 :Pro Forma Income Statements (Revised)
Worksheet for Year End 2007 (Thousands of Dollars)
Particulars 2005 2006 Revised 2007 Revised
Net Sales 215305 228223 249904

Cost of Goods Sold 183307 188284 199923

Gross Profit 31998 39939 49981

Administrative and Selling 18569 18258 18743

Depreciation 2244 2665 2006

Miscellaneous expenses 6297 3994 3124


27110 24219 23873
Total operating expenses
EBIT 4888 15022 26108
2006 2165 -
Interest on short-term loans
1052 1052 1052
Interest on long-term loans
Interest on mortgage 233 210 189

Net income before tax 1597 11595 25050

Taxes 767 5565.60 12024

Net income 831 6029.40 13026

Dividends on stock 208 1507.35 3256.5


623 4522.05 9769.5
Additions to retained earnings
Table 13: Pro farma Balance Sheet (Revised)
Particulars 2005 2006 revised 2007 revised
Assets

Cash 4296 12217 22265

Account receivable 32293 20286 22213

Inventory 51324 33032 35014

Current Assets 87913 65535 79552

Land, building, plant and equipment 25161 32173 33139

Accumulated Depreciation (7363) (10028) (10939)

Net fixed assets 17798 (22145) 22199


Total assets 105711 87680 100657
Liabilities and equities

Short term bank loans 20056 0 0

Account payable 21998 17594 18474

Accruals 8064 10231 12789

Current Liabilities 50118 27826 31263

Long term bank loans 10519 10519 10519

Mortgage 2574 2314 2083

Long term debt 13092 12833 12602

Total liabilities 63211 40658 43865

Common stock 25596 25596 25596

Retained Earning 16904 21426 31196

Owners' Equity 42500 47022 56792


Total Capital 105711 87680 100657
Table 14 Ratio Analysis Year Ended December 31 (Revised
Particulars 2005 2006 revised 2007 revised Industry average

Liquidity ratios

Current ratio 1.75 2.35 2.54 2.50

Quick Ratio 0.73 1.17 1.04 1.00

Leverage ratios

Debt ratio 59.80 46 43.57 50.00

Times interest earned 1.48 4.38 21.19 7.70

Assets management ratios

Inventory turnover (cost) 3.57 5.70 5.70 5.70

Inventory turnover (selling) 4.19 6.9 7.00 7.00

Fixed assets turnover 12.09 10.3 12.00 12.00

Total assets turnover 2.03 2.6 3 3.00

Average collection period 53.99 32 32 32.00

Profitability ratios

Profit margin 0.39 2.64 5.21 2.90

Gross profit margin 14.86 17.5 20 18.00

Return on total assets 0.78 6.87 12.34 8.80


Since, after the payment of short term loan all the ratios of the company are improving we find that
there is no situation that indicates poor financial policy. The impacts on the ratios after the payment of short
term bank loans are as follows:
Liquidity ratios
Current ratio: The improvement in the current ratios of the company shows better ability of the
company to meet its current obligations.
Quick ratio: the increase in quick ratio indicates improvement of the companys ability to meet its
short term obligations.
Leverage ratios:
Debt ratio: The decrease in debt ratio of the company shows the less involvement of debt to finance
fixed assets of the company.
Times interest earned: The improvement in the TIE ratio shows the increase in the operating earnings
to pay interest.
Asset management ratio:
Total asset turnover: The increase in the ratios shows that the company has more efficiently utilized
the overall assets to generate sales revenue.
Profitability ratios:
Profit margin: The increase in the profit margin ratio shows the improvement in the companys ability
to earn of each sale after paying all the necessary expenses.
Return on total assets: The improvement in return on total assets ratio indicates the enhancement in
the effectiveness of the operating management of the firm.
Return on owners equity: the increase in the ratio shows the improvement in both operating and
financial decisions of the company.
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 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?
D) IF YOU FAVOR (A) OR (B) ABOVE, WHAT CONDITIONS
(COLLATERAL, GUARANTEES, OR OTHER SAFEGUARDS) SHOULD
THE BANK IMPOSE TO PROTECT ITSELF ON THE LOANS?
ANALYSIS OF FOLLOWING RATIO SHOWS THAT OPTION B IS BETTER

Debt Ratio
It shows the degree of company relying on outside funds.

2005 0.5980
2006 0.46
2007 0.4657
Industrial Average 0.50
CONTD..

Current Ratio
It shows the how much of current assets, it has to pay the
current liabilities.

2005 1.75
2006 2.35
2007 2.54
Industrial Average 2.50
CONTD..

Times Interest Earned Ratio


It shows the measured of the companys ability to make
interest payment on time.

2005 1.48 Times


2006 4.38 Times
2007 21.19 Times
Industrial Average 7.7 Times
CONTD..

Acid Test (Quick ) Ratio


The company ability to meet the short term debt without
having to sell off receivable.

2005 0.73
2006 1.17
2007 1.42
Industrial Average 1
CONTD..

Profit Margin
It shows how much profit the firm is earning to know
pay the short term and long term loan.

2005 0.39
2006 2.64
2007 5.21
Industrial Average 2.90
THE CONDITIONS (COLLATERAL, GUARANTEE OR OTHER
SAFEGUARDS) THE BANK SHOULD IMPOSE TO PROTECT
ITSELF ON THE LOANS ARE LISTED BELOW:

o Paper /bill of land, building, machinery, furniture.


o Bond
o Company registration License
o Treasury bill
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?

Issue of additional common stock

Delay payment of account payable period and interest


expenses

Minimize inventory level

Taking mortgage loan from banks

Tightening average collection Policy

Sales of fixed assets

Holdback dividend to shareholders


8. EXPLAIN SOME OF THE LESSONS LEARNT FROM THE CASE.
Lessons from this SRM case:

The market penetration and profitability are most essential factors of


sustainability and superiority in the business market.

There is high need of analyzing future environment to make high


yields from the business strategies we had used.

To analyze the strength and weaknesses of the company

To calculate and compare the financial ratios with industry average

To compute and analyze Du Pont system


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?

Issue of additional common stock

Delay payment of account payable period and interest


expenses

Minimize inventory level

Taking mortgage loan from banks

Tightening average collection Policy

Sales of fixed assets

Holdback dividend to shareholders


8. EXPLAIN SOME OF THE LESSONS LEARNT FROM THE CASE.
Lessons from this SRM case:

The market penetration and profitability are most essential factors of


sustainability and superiority in the business market.

There is high need of analyzing future environment to make high


yields from the business strategies we had used.

To analyze the strength and weaknesses of the company

To calculate and compare the financial ratios with industry average

To compute and analyze Du Pont system

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