IMPERIAL NATIONAL BANK

Customer: Green Manufacturing Company

After an analysis, I recommend that Green Manufacturing Company should be extended services. In
20X3 Green Manufacturing Company has exceeded the credit line of $300,000, and has borrowed
additional $150,000. This amount is more than the usual amount the client borrows. However we should
notify that the company is at expansion phase right now as it has invested heavily in its plant.

Over the year 20X3, Green Manufacturing Company has increased its sales by 28% and still managed to
maintain its gross profit margin by keeping the cost of goods sold manageable. The operating margin has
shown a small decline which is attributable to the selling and administrative expenses due to increasing
sales. The return on equity and return on assets have shown a positive trend and have improved over
the year; this is due to the increase in profits more than the rise is assets and retained earnings.

Green Manufacturing Company’s liquidity position is of concern because the company has been
accumulating inventories, and more than half of its current assets comprise of inventory due to this its
quick ratio is even below 1. The accounts receivables and accounts payable are also rising; the average
collection of receivables is done in 46 days now as opposed to 52 days earlier.

The management team of Green Manufacturing Company has an impressive background of marketing
and engineering. Over the year 20X3, asset management has improved as the asset utilization and
equity utilization has increased marginally, which means that the company can produce more sales with
the same assets and capital. During the year, Green Manufacturing Company has borrowed more than
the previous years so its debt management has deteriorated and its cash coverage has worsened from
27.7 to 17.7.

Financial Ratios
20X1 20X2 20X3
Profitability Ratios
Gross profit margin (%) 14.2% 14.3% 13.9%
Operating margin (%) 12.2% 11.9% 11.8%
Return on sales (%) 8.8% 8.6% 8.3%
Return on assets (%) 13.2% 14.7%
Return on equity (%) 16.9% 19.8%

Liquidity Ratios
Current Ratio (number) 2.52 2.46 1.74
Quick ratio (number) 1.37 1.22 0.82

Asset Manangement Ratios

Average collections (period days) 52 46
Inventory turnover 5.08 5.74
Average holding period (days) 72 64
Capital asset turnover 3.37 3.63
Total assets turnover 1.54 1.77

Debt Management Ratios

Debt ratio (%) 21.84% 21.81% 28.33%
Times interest earned 20.5 23.3 15.0
Cash coverage 24.3 27.7 17.7

Green Manufacturing’s
Financial Statements
Income Statement for Years Ended October 31 ($000)
20X1 20X2 20X3

Net sales 6000 7000 9000

Cost of goods sold* 5150 6000 7750
Gross margin 850 1000 1250
Selling, general and administrative 120 170 190
Earnings before interest and tax 730 830 1060
Interest expense 30 30 60
Earnings before taxes 700 800 1000
Taxes at 25% 175 200 250
Net income 525 600 750
Dividends 400 450 400
Addition to retained earnings 125 150 350
*Includes amortization
on plant 80 90 110
on equipment 35 40 50

Balalnce Sheet as of October 31 ($000)

20X1 20X2 20X3

ASSETS
Cash 181 161 81
Martetable securities 210 10 0
Accounts receivable 940 1060 1200
Inventories 1110 1250 1450
Total current assets 2441 2481 2731
Plant, net 1100 1200 1800
Equipment, net 900 950 1010
Total capital assets 2000 2150 2810
Total assets 4441 4631 5541

LIABILITIES AND SHAREHOLDER'S EQUITY

Accounts payable 870 1010 1120
Notes payable 100 0 0
Bank loan 0 0 450
Total current liabilities 970 1010 1570
Common shares 801 801 801
Retained earnings 2670 2820 3170
Total liabilites and shareholder's equity 4441 4631 5541