A Report on

Silver River Manufacturing Company

Submitedby: Submitted to:

Kimee Kumari Jha Prof. Dr. Radhe Shayam Pradhan
Lalan Kumar Saphi
Laxmi Joshi
Laxmi Bhandari
Manisha Shrestha
Niki Kumari

1
General Background
This Silver River Manufacturing Company (SRM), which is a US based, and is large regional
producer of farm and utility trailers specialized lives stock carriers and mobile home chassis
whose stock is traded over the counter. More than 85% of SRM’S sales come from the south
eastern part of the United States though a growing market for customer horse transport vans
designed and produced by SRM is developing nationally and even internationally. 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 2000s caused problem
for agriculture for the SRM who depends on farmers for roughly 45 to 50 percent of total
sales. Several major boat companies in Florida work closely with SRM in designing trailers
for their new offerings. SRM’s 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 2018. Toward the end of 2018, 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 2018, however, towards the end of 2018 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

2
sanctioned short-term 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 2019 through 2020 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 $7,650,000. Mr. White Had
planned to obtain this additional money by a short-term loan from MCNB.
Since, to finance these increases in assets, SRM turned to Marion Country National Bank,
(MCNB) for long term loan in 2019 and increase in its short-term credit lines in both 2019
and 2020. 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. This resulted substantial increase in accounts payable and other short-term
loans. Analyzing upon 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 2020 current, quick and debt ratios failed to meet the
contractual limits of 2, 1.0 and 55% 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, 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 spate of bank

2
failures, were very sensitive to the issue of problem loans. SRM’s Altman Z factor (2.01) for
2020 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 $6,000,000 of the capital during the
first quarter of 2021. 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 2021. 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 mobile 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 2021 and
2022 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 2020 and 82.5%
in 2021 and 80 % in 2022. Similarly, administrative and selling expenses are likely to
decrease from 9% to 8% in 2021 and 7.5% in 2022. Also, the miscellaneous expense would
reduce to 1.75% and 1.25% of sales in 2021 and 2022 respectively. Average collection period
and inventory turnover will be maintained at average industry level.

3
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 2020 (sources and uses of funds
statement) or complete Table 6.

Solution:

Silver River Manufacturing Company

Statement of Changes in Financial Position
For the Year Ended December 31st (thousands of dollar)

Particulars 2019 2020

Sources of funds

Net income after taxes 7,535.00 873.00

4
Depreciation 1,657.00 2,040.00

Funds from operations 9,192.00 2,913.00

Long-term loan 3,188.00 0.000

Net decrease in working capital - 340.00

Total sources 12,380.00 3,253.00
Application of funds
Mortgage change 269.00 260.00
Fixed assets change 2,340.00 2,774.00
Dividends on stock 1,884.00 218.00
Net increase in working capital 7,886.00 340.00
Total uses 1,237.00 3,592.00

5
Analysis of changes in working Capital
Increase (decrease) in current assets
Cash change (1,146.00) (97.00)
AR change 2,252.00 10983,.00
INV change 14,094.00 13630,.00
CA change 15,200.00 24,516.00

Increase (decrease) in current liabilities

NP change 1,914.00 13,133.00
AP change 3,742.00 9,492.00
ACC change 1,658.00 2,231.00

CL change 7,314.00 24,856.00

Net increase (decrease) in working capital 7,886.00 (340.00)

From the above calculation, we can conclude that as there is no change in long term loan, and
there is decrease in net income which results on decrease in source of fund. Whereas there is
little amount of decrease in working capital due to sources of fund in comparison with other
applications of fund.

Question 1(b):

Calculate SRM’s key financial ratios for 2020 and compare them with those of 2018, 2019,
industry average, and contract requirement or complete Table 7.

Solution:

Table 7: Silver River Manufacturing Company Computation of Ratio Analysis

For The Year Ended December 31
Financial Ratios 2018 2019 2020 Industry Contract Remark
Average

Liquidity Ratio

1.Current Ratio, times 3.12 2.75 1.79 2.50 2.00 Poor

2.Quick ratio, times 1.71 1.16 0.77 1.00 1.00 Poor

Leverage ratio 55.00

3.Debt ratio, % 40.01 45.36 58.81 50.00 Poor

(Risky)
4.Time Interest Earned, times 15.08 8.17 1.49 7.70 Very poor
(Risky)

6
Assets management ratios

5.Inventory Turnover 7.14 4.55 3.57 5.70 Poor

(COGS), Times
6.InventoryTurnover(sales), 8.98 5.60 4.20 7.00 Poor
Times
7.FA turnover 11.51 11.98 12.10 12.00 Ok

8.TA turnover 3.00 2.55 2.00 3.00 Poor

9. Average Collection Period 37.55 38.89 56.96 32.00 Very Poor

Profitability Ratio

10.Net profit margin, % 6.04 4.07 0.45 2.90 Very Poor

11.Gross profit margin, 20.43 18.85 14.86 18.00 Poor

%
12.Return on TA, % 18.14 10.40 0.89 8.80 Poor

13.ROE, % 30.23 19.03 2.17 17.50 Poor

1.1 Liquidity Ratio:

1.1.1 Current ratio:

It indicates the extent to which current assets are sufficient to pay current liabilities. It is
calculated as under:
Current ratio= current assets/ Current liabilities

7
 current ratio
3.5

3 3.12

2.75
2.5
2.5 2.5
2.4
2

1.78
1.5

0.5

0
2018 2019 2020

SRM Ind. Avg

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 2020 as compared to 2018, 2019
and industry average. i.e. 1.78 < 3.12, 2.75& 2.50.

1.1.2 Quick ratio:

It measures the liquidity position of company and it shows the ability of payment. It can be
calculated as:

Quick ratio= quick assets/ current liabilities

8
 1.8 Quick ratio
1.6 1.71

1.4

1.2
1.16
1
1 1 1
0.8
0.76
0.6

0.4

0.2

0
2018 2019 2020

SRM Ind. Avg

The quick ratios of SRM’s of 2018, 2019 are high, whereas for 2020 is less than both years.
The industry average is also more than that of quick ratio of SRM (i.e. 0.76<1.71, 1.16 and
1.00), which indicate the less liquidity position of this company.

1.2. Leverage ratio:

1.2.1 Debt ratio

9
 Debt ratio
70

60
58.8
50
50 50 50
45.36
40
40.1
30

20

10

0
2018 2019 2020

SRM Ind. Avg

In comparison to the industry average, SRM is taking more risk than the competitors where
industry average is 50% and that of the SRM are 58.8%. It is clear in the sense that the debt
ratios have been in increasing trend i.e. 40.01%, 45.36% and 58.8% in year 2018, 2019 and
2020 respectively which resembles the company’s more dependency towards leverage in
comparison with previous year.

1.2.2 Time interest earned ratio:

10
 TIE
16

14 15.08

12

10

8
8.17
7.7 7.7 7.7
6

2
1.49
0
2018 2019 2020

SRM Ind. Avg

The time interest earned ratio is declined from 2018 to 2020 but is not below 1 so it is still
able to meet its interest obligations. So, from this we can easily see the decreasing interest
paying capacity of SRM over the years. And in the year 2020 SRM has failed to maintain the
ratio as off industry.

1.3 Asset management ratio:

1.3.1 Inventory turnover ratio (cost):

11
 Inv turn. (COGS)
8

7 7.14
6
5.7 5.7 5.7
5
4.55
4
3.57
3

0
2018 2019 2020

SRM Ind. Avg

1.3.2 Inventory turnover (selling):

Inv turn. (sales)

10
9
8.98
8
7
7 7 7
6
5 5.6

4 4.19
3
2
1
0
2018 2019 2020

SRM Ind. Avg

Inventory turnover ratio has decreased from 7.14 to 3.57 times on cost and 8.98 to 4.19 times
on sales respectively in the year between 2018 and 2020, it shows the company is not
efficient in managing the inventory.
1.3.3 Total asset turnover ratio:

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 Total Assets Turnover
3.5

3
3 3 3 3
2.5
2.55

2
2
1.5

0.5

0
2018 2019 2020

SRM Ind. Avg

In 2020, the total asset turnover is $ 2.00 which is less in contrast with 2018(i.e.$ 3.00). This
indicate the company is not capable to utilize its total asset. As the industry average is $3.00,
which means SRM is not using its asset effectively to increase the productivity of the
company with respect to generate sales.

1.3.4 Fixed asset turnover ratio:

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 FA Turnover
12.2
12.1
12.09
12
12 11.98 12 12
11.9
11.8
11.7
11.6
11.5
11.51
11.4
11.3
11.2
2018 2019 2020

SRM Ind.Avg
Effective utilization of fixed asset has been done by SRM, as the turnover generated from
fixed asset are in increasing trend i.e. from $11.51, to $12.09 in 2018 to 2020. The industry
average is $12 is less than that of Silver River Manufacturing it means the company has used
its fixed assets effectively.

1.3.5 Average collection period:

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 Avg. coll. pd
60
56.96
50

40
37.55 38.89

30 32 32 32

20

10

0
2018 2019 2020

SRM Ind.Avg
This ratio measures the average number of days customers take to pay their bills, which
resemble the effectiveness of credit and collection policies of the business. This ratio also
determines if the credit terms are realistic.
In case of SRM it takes 37.55 days to collect its receivable in 2018 which increased to 56.96
in 2020. When compared to the industry average, SRM is less capable of collecting the
receivables as compared to industry average.

1.4. Profitability ratios:

1.4.1 Profit margin (%)

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 Net Profit Margin
7

6
6.04

4
4.07

3
2.9 2.9 2.9
2

0 0.44
2018 2019 2020

SRM Ind. Avg

The profit margin ratio of SRM Company in 2018 is 6.4 and in 2020 is 0.44, which shows the
rapid decrease in profit margin ratio. The industry average is found to be 2.9, which indicate
SRM possess lesser profit margin compared with competitors.

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1.4.2 Gross profit margin (%)

Gross Profit Margin

25

20 20.43
18.85
18 18 18
15
14.86

10

0
2018 2019 2020

SRM Ind. Avg

The gross profit margin are 20.43% in 2018 to 14.86% in 2020, 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

1.4.3 Return on total asset:

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 Return on Total Assets
20
18
18.14
16
14
12
10 10.4
8 8.8 8.8 8.8
6
4
2
0 0.89
2018 2019 2020

SRM Ind. Avg

The return on assets of SRM has been declining from 18.14% to 0.89% from 2018 to 2020.
Compared to industry average of 8.8% other companies are more efficient in generating
profit using its assets

1.4.4 Return on owner’s equity

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 ROE
35

30
30.23

25

20
19.03
17.5 17.5 17.5
15

10

2.57
0
2018 2019 2020

SRM Ind. Avg

Capabilities of generating profit from shareholders money determine the ROE. Return on
equity for SRM is rapidly declining from 2018 to2020, (i.e. 30.23 to 2.57%), 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. X1=CA-CL/TA= (41,816.00-13,392.00)/56,580.00 = 0.5024 = 50.24%

Based on the case data and the results of your analysis in Question 1, what are the SRM’s
X2 = Retained
strengths and weaknesses? What Earnings/ Totalthereof?
are the causes Assets =(Use
10,674.00/56,580.00 = 18.87%
of the Du Pont system and
Altman Z factor would facilitate analysis and strengthen your answer.)
Solutions, X3 = EBIT / Total Assets = 18,317.00/56,580.00 = 0.3237 times
For 2018

No. of shares = 23,270.00

EPS=NI/No. of shares=10,262.00/23,270.00=0.441

MPPS=P.E*EPS=6.6*0.441=2.91

ME = No. of shares * MPPS = 23,270.00*2.91=67,716.00

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X4 = ME / Book Value of Total Debt = 67,716.00/22,636.00=2.99

For 2019

X1=CA-CL/TA= (57,017.00-20,706.00)/72,465.00=50.11%

X2 = Retained Earnings/ Total Assets = 16,326.00/72,465.00 = 22.53%

X3 = EBIT / Total Assets = 14,310.00/72,465.00 = 0.1975 times

No. of shares = 23,270.00

EPS=NI/No. of shares=7,535.00/23,270=0.324

MPPS=P.E*EPS=5.3*0.324=1.72

ME = No. of shares * MPPS = 23,270*1.72=40,024.40

X4 = ME / Book Value of Total Debt = 40,024.40/32,869.00=1.22

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For 2020

X1=CA-CL/TA= (81,533.00-45,562.00)/97,715.00=36.81%

X2 = Retained Earnings/ Total Assets = 16,980.00/ 97,715.00= 17.38%

X3 = EBIT / Total Assets = 4,445.00/97,715.00= 0.045 times

No. of shares = 23,270.00

EPS=NI/No of shares=873.00/23,270.00=0.036

MPPS=P.E*EPS=4.6*0.036=0.173
2.1 Altman Z Factor:
ME = No. of shares * MPPS = 23,270*0.173=4,026.00

3.5
X4 = ME / Book ValueZof
3.04 Total Debt = 4,026.00/57,465.00=0.07
Factor
3
2.57
2.5
2.01
2

1.5

0.5

0
2018 2019 2020

Z Factor

2.2 Du Pont Analysis of SRM

For 2018

ROE = NI/Sales * Sales/Total Assets * Total Assets/Total Equity

ROE = 10,262.00/170,000.00 * 170,000.00 /56,580.00 *

56,580.00/33,944.00
ROE = NI/Sales * Sales/Total Assets * Total Assets/Total Equity

For 2019 ROE = 0.0604 * 3.00 * 1.667 = 0.3021 =30.21%

ROE = 7,535.00/185,000.00 * 185,000.00 /72,465.00 *
ROE = NPM * TAT * EM
72,465.00/39,596.00
21
ROE = 0.0407 * 2.55 * 1.8301 = 0.1899 =18.99%
For 2020

ROE = NI/Sales * Sales/Total Assets * Total Assets/Total Equity

ROE = 8,73.00/195,732.00 * 195,732.00 /97,715.00 * 97,715.00

97,715.00/40,250.00

ROE = 0.0044* 2.00 * 2.43 = 0.0214 =2.14%

ROE = NPM * TAT * EM

2.3 Du Pont Analysis:

ROE
35.00%

30.00%

25.00%

20.00% ROE

15.00%

10.00%

5.00%

0.00%
2018 2019 2020

Based on the case data and the results of ratio analysis SRM’s strengths and weaknesses and
the causes thereof are listed below:
Strengths:

The fixed asset turnover ratio 12.09 in 2020 is increasing, which is more than industries ratio
i.e. 12 times. So, we can conclude that the company is using the fixed assets in an efficient
way.

Altman’s Z factors for 2020 is 2.01 which is between 1.81 and 2.99. So, the company fall

22
under the gray zone and if some improvements are not done and resource are not managed
efficiently, company might go under the bankruptcy, So, the company need to be more
careful.

Weakness:

The current ratio and quick ratio are poor in 2020 as compared to industries which indicates
that company will not be able to pay creditor if the demand money. So, this shows the bad
performance of the company.

The debt ratio of the company is also higher as compared to industry average. So, company
need to reduce debt financing and should be encourage to employee more of equity for
efficient management.

The times interest ratio is also very low which indicates the risk in the company. The
inventory turnover and assets turnover as compared to the industry is also very lower as
compared to industry average. Company is not able to collect its receivable in short period of
time. Industries is collecting within 32 days but in 2020, it takes about 57 days for the
company to collect the receivable amounts.

The profitability ratio indicates the company is not performing well as of its competitors and
the industry. Company earning per share (eps) is declining gradually form years which shows
the bad performance if the company.

Question No.3.

If the bank were to maintain the present credit lines and grant an additional $6,000,000 short-
term loan at a 16 percent rate of interest effective from January 1, 2021, would the company
be able to retire all short-term loans existing on December 31, 2021? (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 40%. Assume that
SRM pays no cash dividends during the year.) Complete tables 9 and 10 included as
worksheets to facilitate analysis.
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Table 9: Silver River Manufacturing Company

Pro Forma Income Statements (Projected)

(Thousands of Dollars)

Particulars 2020 2021 2022

Projected Projected
Net sales 195,732 207,476 227,186
Cost of goods sold 166,642 171,168 181,749

Gross profit 29,090 36,308 45,437

Administrative and selling expenses 16,880 16,598 17,039

Depreciation 2,040 2,423 1,824
Miscellaneous expenses 5,725 3,631 2,840

Total operating expenses 24,645 22,652 21,703

EBIT 4,445 13,656 23,734

Interest on short term loan 1,823 3,877 3,877

Interest on long-term loans 956 860 774
Interest on mortgage 211 190 171

Net income before tax 1,455 8,729 18,912

Taxes 582 3,492 7,565

Net income 873 5,237 11,347

Dividends on stock 218 - -

Additions to retained earnings 655 5,237 11,347

Working Note:

Calculations

Particulars 2021 2022

Projected sales 195,732*1.06 207,476 207,476* 1.095 227,186

Cost of goods sold 82.5% of 207,476 171,168 80% of 227,186 181,749

Administrative and selling

expenses 8% of 207,476 16,598 7.5% of 227,186 17,039
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 Miscellaneous expenses 1.75% of 207,476 3,631 1.25% of 227,186 2,840

Taxes 40% of 8,729 3,,492 48% of 18,912 7,565

Table 10: Silver River Manufacturing Company

Pro Forma Balance sheets (Projected)
Worksheet for Year End 2022 (Thousands of Dollars)
Particulars 2020 2021 Projected 2022 Projected
Asset
s
Cash 3,905 38,079 49,677
Accounts receivable 30,970 18,442 20,194
Inventory 46,658 30,029 31,886
Current assets 81,533 86,550 101,757

Land, Building, plant and 22,874 29,249 30,126

equipment
Accumulated depreciation (6,692) (9,116) (10,939)
Net fixed assets 16,182 20,132 19,187

Total assets 97,715 106,682 120,944

Liabilities and
equities
Short term bank loans 18,233 24233 24,233
Account payable 19,998 15,995 16,795
Accruals 7,331 9,301 11,626
Current liabilities 45,562 49,529 52,654

Long term bank loans 9,563 9,563 9,563

Mortgage 2,340 2,104 1,894
Long term debt 11,903 11,666 11,456
Total Liabilities 57,465 61,195 64,110
Common stock 23,270 23,270 23,270
Retained earnings 16,980 22,217 33,564
Owners’ equity 40,250 45,487 56,834

Total Capital 97,715 106,682 120,944

25
Working Note for table 10:

3.1 Retained Earnings

For 2016: Retained earnings (2020) + Addition in 2021 i.e.16,980 + 5,237= $22,217

For 2022: Retained earnings (2021) + Addition in 2022 i.e. 22,217+11,347= $33,564

3.2 Accounts Receivables

For 2021: Average collection period = Receivables / Sales per day i.e. 32= Receivables /
(207,476/ 360 Therefore, receivables = $18,442
For 2022: Average collection period = Receivables /Sales per day i.e. 32 =Receivables
/(227,186/ 360) Therefore, receivables =$20,194

Inventory

ITR = COGS /inventory

For 2021,

ITR =171,168/inventory 5.70=171,168/inventory Inventory= 30,029

For 2022,

ITR= COGS/ inventory

5.70 = 181,749/inventory Inventory= $31,88

26
Therefore, the residual balancing figure of cash for 2021 is $38,079 and for 2022 is $49,677. In 2021, the
company had total balance of $38,079 and during the same year the short-term bank loan to be retired is,
$24,233.

$(38,079 – 24,233)

$13,846

5% of sales is maintain by the company

Minimum cash balance = $ (207,476* 0.05)

= $ 10,374

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.

27
Question No.4.

Compute projected financial ratios for 2021 and 2022 (or complete Table 11). Compare these ratios with
2020 along with industry averages and analyze improvement or deterioration in financial condition.
Table 11: Silver River Manufacturing Company

Ratio Analysis Year Ended December 31, 2022 (Projected)

Particulars 2020 2021 2022 Industry Comment Comment

Projected Projected Average 2021 2022
Liquidity ratios
1.Current Ratio 1.79 1.74 1.93 2.50 Poor Poor
2.Quick ratio 0.76 1.13 1.33 1.00 Good Good
Leverage ratios
3, Debt ratio, % 58.8 57.36 53.00 50.00 High (Risky) High (Risky)
4.Time Interest Earned 1.49 2.77 4.92 7.70 Low (Risky) Low (Risky)
Assets management
Ratios
5.Inventory turnover 3.57 5.70 5.70 5.70 Ok Ok
(Cost)
6.Inventory turnover 4.19 6.91 7.12 7.00 Poor Ok
(selling)
7.Fixed Assets turnover 12.10 10.31 11.84 12.00 Poor Poor

28
8.Total Assets turnover 2.00 1.96 1.91 3.00 Poor Poor
9. Average collection 56.96 32 32 32.00 Ok Ok
Period (days)
Profitability Ratios
10. Profit margin (%) 0.45 2.52 4.99 2.90 Somewhat low Ok
11. Gross profit margin 14.86 17.50 20.00 18.00 Somewhat low Ok
(%)
12. Return on Total Assets 0.89 4.91 9.38 8.80 Poor Ok
(%)
13. Return on owners’ 2.17 11.51 19.96 17.50 Poor Ok
equity (%)

4.1 Ratio

Working Note

Current Assets
a) Current Ratio, 2020 =
Current Liability

81,533
=
45,562

=1.79 times

85,852
2021 (projected) =

49,529

= 1.74 times

101,757
2022(projected) =

52,654

= 1.93 times
Current Assets −
Inventory
b) Quick Ratio,2020 =
Current Liabilities

81,533-46,658
45,
= 562

= 0.76 times

2021 (projected) = 86,550−30,029

29
49,529

1.14 times

101,757- 31,886
2022 (projected) =

52,654
= 1.33 times

c) Debt Ratio,2020 = Total Debt

Total Assets

57,465
97,715

= 0.588 i.e. 58.80%

2022(Projected) = 61,195
106,682

= 0.5736 i.e. 57.36%

64,110
2022(projected) =
120,944

= 0.53 i.e. 53.00%

EBIT
d) Times Interest Earned,2020 =
Interest
4,445

1,823+ 956+211

= 1.49 times

13,657
2021 (projected) =
3877+860+190

= 2.77 times

23,734
30
 2022(projected) =
3877+ 774 +171

= 4.92 times

COGS
e) Inventory Turnover(cost), 2020 =
Inventory

166,642
=
46,658

= 3.57 times

171,168
2021(projected) =
30,029

= 5.70 times

181,749
2022(projected) =

31,886

Sales

f) Inventory Turnover(selling), 2020 =

Inventory

195,732
=
46,658
= 4.19 Times

207,476
2021(projected) =
30,029
= 6.91 times

227,186

2022(projected) =
31,886
= 7.12 times
= 5.70 times

31
32
 Net Income

g) Return on Total Assets,2020 =

Total Assets
873
=
97,715

= 0.89%

5237
2021(projected) = 106,682

= 0.0491 i.e. 4.91%

11347
2022(projected) = 120,944

= 0.0938 i.e. 9.38%

Net
Income
h) Return on owners’ Equity,2020 = Equity

873
= 40,250

= 0.0217 i.e. 2.17%

5237
2021(projected) =
45,487

= 0.115 i.e. 11.51%

11,347
2022(projected) =
56,834

= 0.1996 i.e. 19.96%

Question No.5.

If all short-term bank loans are repaid towards the end of the first half of 2021, do you think
that company is still able to pay regular dividends and maintain minimum cash balance?

33
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?

Solutions,

If all the short-term loans are repaid at the end of first half of 2021, the company would be
able to pay its regular dividends in 2021 as well as in 2022. This is because the interest on
short term loan is being in 2021 and is being zero by 2022.

The minimum cash balance required at the end of 2021 is $12,448.55 (5% of 248,971). The
company after paying the dividend of 25% during the year 2021 has the cash balance of
$13,327. So, the company will be able to maintain the minimum cash balance of $12448.55.

The impacts on the ratios after the payment of short-term bank loans are:

34
Table 12: Silver River Manufacturing Company
Pro Forma Income Statements (Revised)
(Thousands of Dollars)

Particular 2020 2021(Revised) 2022(Revised)

Net sales 195,732 207,476 221,186

Cost of good sales 166,642 171,168 181,749

Gross profit 29,090 36,308 45,437

Administrative and selling 16,880 16,598 17,039

Depreciation 2,040 2,423 1,824

Miscellaneous expenses 5,725 3,631 2,840

Total operating 24,64 22,65 21,70

expenses 5 2 3

EBI
T 4,445 13,656 23,734

Interest on short term-loans 1,823 1,939 1,939

Interest on long- term loans 956 860 774

Interest on mortgage 211 190 171

Net income before tax 1,455 10,667 20,850

Taxes @ 0.40 582 4,267 8,340

Net income 873 6,400 12,510

Dividend on stock (25% ) 218 1,600 3,128

Additions to retained earnings 655 4,800 9,352

35
Table 13: Silver River Manufacturing Company

Pro Forma Balance Sheets (Revised)

(Thousands of Dollars)

Particulars 2020 2021(Revised) 2022(Revised)

Assets

Cash 3,905 13,409 23,043

Account receivables 30,970 18,442 20,194

Inventory 46,658 30,029 31,886

Current assets 81,533 61,880 75,123

Land, building, plant and equipment 22,874 29,249 30,126

Accumulated depreciation (6,692) (9,116) (10,939)

Net fixed assets 16,182 20,132 19,187

Total assets 97,715 82,012 94,310

Liabilities and equities

Short term bank loan 18,233 - -

Account payable 19,998 15,995 16,795

Accruals 7,331 9,301 11,626

Current liabilities 45,562 25,296 28,421

Long term bank loans 9,563 9,563 9,563

Mortgage 2,340 2,104 1,894

Long term debt 11,903 11,666 11,456

36
Total liabilities 57,465 36,962 39,877

Common stock 23,270 23,270 23,270

Retained earnings 16,980 21,780 31,163

Owner equity 40,250 45,050 54,433

Total capital 97,715 82,012 94,310

37
Working note:

For calculating account receivables,

2021: average collection period = receivable /(sales/360)

32 = receivables/ (207,476/360)

Receivable = $18,442

Similarly for 2022, average collection period = receivable /(sales/360)

32 = receivables/ (227,186/360)

Receivable= $20194

Inventory turnover ratio 2021 = COGS / inventory

5.7 = 171,168/inventory Inventory= 30,029

Inventory turnover ratio 2022 = COGS / inventory

5.7 = 181,749/inventory Inventory= 31,886

38
Table 14: Silver River Manufacturing Company
Ratio Analysis Year Ended December 31 (Revised)

2021(Revised 2022(Revised Contract Remark

Financial Ratios 2020 ) ) Industry s Remarks
Average 2021 2022
Liquidity Ratio

Current Ratio,
Times 1.79 2.45 2.64 2.5 2.00 poor ok

Quick Ratio, 1.00

Times 0.77 1.26 1.52 1.00 ok good

Leverage Ratio

TD/TA, % 58.81 45.07 42.28 50% 55.00 ok ok

Time Interest
Earned 1.49 4.57 8.23 7.70% poor ok
Ratio, Times
Assets
Management
Ratio
Inventory
Turnover 3.57 5.70 5.70 5.7 ok ok
(COGS), times
Inventory 4.20 6.9 7.12 7 poor ok
Turnover (Sales),
Times
Fixed assets 12.10 12.82 11.84 12 poor poor
Turnover
Total assets 2.00 2.53 2.41 3 poor poor
Turnover
Average
collection 56.96 32.00 32.00 32 ok ok
Period(days)
Profitability
ratio

Profit margin, % 0.45 3 5.51 2.90% ok good

Gross profit
margin, % 14.86 17.5 20.00 18% poor ok

Return on total 0.89 7.8 13.26 8.88% poor good

Assets, %
Return on owners’ 2.17 14.20 22.98 17.50% poor good
Equity, %

39
Working note:

Current Assets
Current Liability
a. Current Ratio (2021) =

61,880

=
25,296

= 2.45 times

57,123
CR (2022) =

28,421

= 2.64 times

Cash + Account receivable

b. Quick ratio (2021) =
Current Liabilities

40
13,409+18,442
25,296

1.26 times

2022 = 23,043+20,194

28,421

1.52 times

Total Debt
c. Debt Ratio = Total Assets

36,962
(2021) =
82,012

= 45.07 %

39,877

(2022) =

94,310

= 42.28%

EBIT
d. Times interest earned ratio (2021) =
Interest

= 13,656
1,939+860+190

4.57 times

23,734

(2022) =
1,939+774+171

= 8.23 times

COGS
e) Inventory Turnover (COGS) 2021 =

Inventory

41
= 171,168
30,029

= 5.70 Times

181,749
2022 =
31,886

= 5.70 times

Sales
f) Inventory Turnover (selling) 2021 = Inventory

207,476
= 30,029

= 6.9 times

227,186
( 2022) = 31,886

= 7.12 times

Sales
g) Fixed Assets Turnover (2021) = Fixed assets

207,476
= 16,182

= 12.82 times

227,186
(2022) = 19,187

= 11.84 times

42
Sales
h) Total Assets Turnover Ratio (2021) = Total Assets

207,476
= 82,012

= 2.53 times

227,186
(2022) = 94,310

= 2.41 times

Receivable
i) Average Collection Period(2021) = Sales/360

18,442
= 207,476/360

= 32 days

20,194
(2022) = 227,186/360

= 32 days

Net Income
j) Profit Margin Ratio (2021) = Sales

6,400
= 207,476

= 3%

12,510
(2022) = 227,186

= 5.51%

43
Gross Profit
k) Gross Profit Margin (2021) = Sales

36,308
= 207,476

= 0.175 i.e. 17.50%

45,437
(2022) = 227,186

= 0.20 i.e. 20%

Net Income
l) Return on Total Assets (2021) = Total Assets

6,400
= 82,012

= 7.8%

12,510
(2022) = 94,310

= 13.26%

Net Income
m) Return on Owner's equity (2021) = Common Equity

6,400
= 45,050

= 14.20%

44
12,510
(2022) = 54,433

= 0.2298 i.e. 22.98%

45
Again,

Comparing the proposed and revised financial ratios with 2015.

2021 2021 2022 2022

Particulars 2020 (Projected) (Revised) (Projected) (Revised)

Current ratio 1.79 1.75 2.45 1.93 2.009

Quick ratio 0.765 1.14 1.26 1.33 1.52

Debt ratio(%) 59 57.36 45.07 53.01 42.28

Time interest earned

ratio % 1.49 2.77 4.57 4.92 8.23

Inventory
turnover(cost) 3.57 5.70 5.70 5.70 5.70

Inventory
turnover(selling) 4.19 6.91 6.9 7.13 7.12

Fixed assets turnover 12.09 10.31 12.8 11.84 11.84

Total assets turnover 2.003 1.94 2.53 1.88 2.41

Average collection
Period(days) 56.96 32 32 32 32

Profit margin % 0.446 3.08 2.64 5.51 5.17

Gross profit margin % 14.86 17.50 17.50 20 20

Return on total assets

% 0.89 4.91 6.88 9.38 12.86

46
Return on equity % 2.17 11.51 12.82 19.97 22.8

47
Question 6. On the basis of your analyses, do you think that the bank should?

Extend the existing short- and long-term loans and grants the additional $6,000,000 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 safeguards) should
the bank impose to protect itself on the loans?

Answer

From our analysis we found that bank should extend the existing short and long – term loans
and grant the additional $6,000,000 loans. From the case, we know that the SRM was a good
client of MCNB as they usually never had any due, giving them unquestioned reputation.

The current problem occurred due to financial downturn which was forced on people all
around which affect the sales revenue of the firm because of the unexpected change in
climate condition that reduce the demand of the products, but the problem can be said to be
temporary.

As we see in the year 2019-2020, we see that the financial position of the firm is degrading
till 2020. The entire ratio from liquidity to profitability is decreasing. From the Altman Z
factor, we know the potential failure indication, which has been decreasing from 3.09 to 2.05.
Z factor being in the gray Zone means that the company must watch its activity very
carefully, since bankruptcy is around the corner.

Further, Mr. White had signed a contract for a plant expansion. The company has jumped into
custom horse van which is a beneficial area. According to Mr.

White’s analysis, this area is free from recession. The company’s financial position might
improve significantly over the next two years.

Analyzing the condition of SRM we can find that they seem quite able to repay their short-
term loan

48
In addition, for the purpose of safety, bank should impose collaterals, guarantees and other
safeguards. The collaterals will serve as a value given or pledged as security for payment of
loan. In this case, the bank may charge SRM following collaterals:

Financial collaterals: o Stocks,

oNegotiable paper

Merchandise collaterals:

Warehouse receipts, o Rights in real estate’s o Machineries,

oFurther,
oLivestock.

The most promising collateral option for the bank to charge SRM would be the new

operation which is going to start. Above mentioned collaterals may also be charged by

the bank in securing itself from default. In case of default, the bank may sell the

collateral pledged by SRM and apply the money thus acquired to payment of the debt.

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?

Answer:

In case if the bank withdraws the entire line of credit and demands immediate repayment of
the two existing loans, SRM can adopt following actions:

Take mortgage loan from bank:

SRM has land, buildings, plant and equipment worth of $ 27,448. Hence, it can request loan
with another bank mortgaging its land and buildings.

49
Sell accounts receivables and liquidate inventory:

SRM has accounts receivables of $ 35,228 and inventory worth $ 55,990. It can sell its
receivables and liquidate the inventory in order to repay the loan.

Make strict collection policies:

The average collection period of SRM is 56.96 days in 2020. The company has to make its
collection policies stricter. So, that the debtors will pay in time. Here, SRM is adopting liberal
collection policies.

SRM has to take immediate actions as well as gradual 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 8. Explain some of the lesson learnt from the case.

Answer: After analyzing the case of SRM Company we learnt to analyze the case ofthe
company, to calculate the financial ratios and know its interpretation, to learn to compare the
financial ratios with industry average, learn to compute and analyzed Du Pont System. They
are briefly discussed below:

To analyze the company’s financial position on the basis of ratio analysis:-

After analyzing all the issues of SRM Company, we are able to analyze financial position of
company. We also further learnt how to interpret the financial statement by comparing with
industry average.

b. To decide what types of company should be given loan:-

After solving the issues of SRM Company we can evaluate that what kind of loan must be
given or taken to the company under certain situation of the company.

50
c. To analyze financial ratios of the company:-

We have learnt different ratios to analyze financial performance of the company

through which various decisions can be performed. The different ratios we have learnt

in the case are liquidity ratio, assets management ratio, debt management ratio,

profitability ratio, market value ratio, Altman Z factors.

d. For decision making process:-

For the loan purpose the bank must analyze the different ratios of the company like:
Short-term loan: Liquidity ratio

It includes current ratio and quick ratio.

Long-term loan: Solvency ratio

It includes profit margin ratio, debt ratio, time interest ratio and different turnover ratios.

51
52
CONCLUSSION

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.

53
Financial ratio used in case

Current Assets
1. Current Ratio = Current Liabilities

Current Assets -
Inventory
2. Quick Ratio =
Current Liabilities

Total Debt
3. Debt Ratio =
Total Assets
EBIT
4. Times Interest Earned = Interest

COGS

5. Inventory Turnover (cost) = Inventory

Sales

6. Inventory Turnover (selling) = Inventory

7. Return on Total Assets = Net Income

Total Assets

Net Income
8. Return on owners’ Equity =
Equity

Fixed assets turnover = Sales/Net fixed assets

Total assets turnover = Sales/ Total assets

Net profit margin = Net income/ Sales

Basic earning power = EBIT/Total assets

54
Return on equity (ROE) = Net Income / Equity

EPS = NI/ No. of shares

Price-earning (P/E) = MPS/ EPS

Book value per share = Book equity/ No. of shares

Market/Book values = MPS/ Book value per share

55
ROE =NPM x TAT x EM

Z=0.012 X1 +0.014 X 2 +0.033 X3+0.006 X4+0.999 X5

X1 = (CA-CL)/ TA, %

X2 = Retained Earnings/ Total Assets, %

X3 = EBIT / Total Assets, %

X4 = ME / Book Value of Total Debt (market value of equity includes

both pref. & com. shares, and debt includes CL + LTL), %

X5 = sales/total assets, times

56
57
58