silver river manufacturing company (srm).docx

Case Analysis: Silver River Manufacturing CompanyThe Financial management case

7/23/2015Global College InternationalPrekshya Lamsal Rojina Lohani Saloni Nakarmi Sandesh Bhusal Santosh Giri Siddhartha Chhetri Suprava Sharma Sudhir Bogati Sujata Pathak

Case Analysis: Silver River Manufacturing Company

1. General Background

Silver River manufacturing organization is a large regional product if a farm and it is an

agribusiness supplier who relies on upon agriculturists for 45-50 percent of its aggregate

deals. In the decade before 2003, SRM had encountered high and moderately enduring

development in deals, resources and benefits. Greg White the president of SRM was very

little worry about the budgetary position of the association yet after the end of 2003, the

interest for new field trailers in the citrus and vegetable commercial ventures began to tumble

off and Marion Nation National Bank likewise attempted to survey his credit installment

framework. The retreat that had been tormenting the country's ranch economy and appalling

stops for two straight winters brought about high abbreviation of interest for woods retailer

and citrus transport bearers; SRM was not insusceptible to this. In spite of the fact that SRM

had demonstrated high and relentless development in deals, resources and benefits preceding

2003, on the other hand, towards the end of 2003 the interest for new field trailers in citrus

and vegetable commercial ventures began for tumble off. SRM was likewise influenced by

the retreat and on the highest point of this the business went down steadily. Then again, his

agrarian items were likewise influenced by the terrible atmosphere.

SRM in outlining trailers for their new offerings, and these river trailer packages are sold

through across the country merchant systems of the support organizations. With couple of

special cases, the products produced by SRM are not subject to innovative obsolescence or

to decline, and in those occasions where innovation is an element to be viewed as, SRM

holds a few licenses with which it can mostly balance a portion of the dangers. Marion Area

National Bank (MCNB) is the official investor of SRM that has authorized short and long

haul credit offices. MCNB considered SRM to be a monetarily stable and effectively

overseen firm until the manifestations of sickness of SRM surfaced. Being a nearby

companion and a well-wisher, Miss Lesa Nix, VP of MCNB, advises Mr. White that the

money related wellbeing of SRM intensified from 2004 through 2005 such that MCNB

should seriously mull over getting back to back the credit offices while SRM has made a

promise to extend its office obliging an extra reserve of $7,012,500 . Mr. White Had wanted

to get this extra cash by a transient credit from MCNB.

Financial Management Group 2


Organization (SRM) is an expansive territorial result of homestead and utility trailers

particular lives stock bearers and invented house suspension possessed by Greg White. They

import more than 85% of SRM'S deals originate from the south eastern piece of the United

States. A few notable support organizations in Florida work nearly with SRM in outlining

trailers for their new offerings. SRM is a notable customer of Marion Nation National Bank

(MCNB). Because of the subsidence that had been disturbing the country's homestead

economy since 2000s brought on issue for agribusiness for the SRM who relies on upon

agriculturists for approximately 45 to 50 percent of aggregate deals. SRM whose items are

completely in view of most recent innovation and SRM hold a few licenses with which it can

somewhat balances a portion of the danger.

In spite of such unfriendly conditions Nix considered the organization to have great long run

prospects, expecting, obviously that administration responded promptly and properly to the

present circumstance. Thus, Nix had looked upon the danger of quickening the advance

reimbursement essentially as it intends to stand out enough to be noticed and too to constrain

him to consider uplifting moves that must be made to moderate SRM's transient issues. With

a specific end goal to alleviate the issue white forcefully diminish the further deals as he

trusted it would permit him to acknowledge more notable economies of scale underway and

to ride the experience bend to a lower expense position. Hence, generation proceeded with

unrestricted and inventories begin to increment.

To keep up the already high development of offers and to diminish the regularly growing

stock SRM decrease cost as well as a piece of a "coordinated business entrance arrangement"

offered more good credit terms and loose credit guidelines. Despite the fact that she wanted

to abstain from calling the credits if at all conceivable in light of the fact that that activity

would back SRM into a tough situation from which it may not have the capacity to rise in

place, Nix understood that the bank's analysts, because of the late spate of bank

disappointments, were exceptionally touchy to the issue of issue advances. SRM's Altman Z

calculates (2.88) for 2005 was underneath 2.99, which showed that SRM was liable to get

bankrupt in two years. On account of this lack, MCNB was under expanded weight from the

controllers to rename SRM's advance as 'issue classification' and make whatever strides



expected to gather the cash due and decrease the bank's presentation as fast as practicable. So

as to keep away from renaming, SRM obliged solid and persuading proof to demonstrate that

its issues was interim in nature and it had great shot of turning around the pattern.

Consequently, to back these increments in resources, SRM changed to Marion Nation

National Bank, (MCNB) for long pull advance in 2004 and increment in its transient credit

advance in both 2004 and 2005.MCNB had been a noteworthy financier of SRM for quite a

while. In the beginning, Lesa Nix, the VP of MCNB, had taken care of the instance of SRM.

Later, she got advanced and was no more in charge of taking care of SRM's record. On the

other hand, as Mr. White was a nearby companion, despite everything she took unmistakable

fascination on SRM. Indeed, even this was inadequate to cover the forceful extension on the

benefit side. Thusly, Greg White who constantly made brief installments began to defer

installments. This came about significant increment in records payable and other transient

credits.

The current financial related issues were not by any means the only issue Mr. White

confronted. He had as of late marked an agreement for a plant extension that would require

another $7012500 of the capital amid the first quarter of 2006. He had wanted to get this cash

by a fleeting advance from MCNB to be reimbursed from the benefit created in the first a

large portion of 2006. He accepted that new offices would improve the generation capacities

in an extremely profitable territory of custom steed van.

As per Mr. White's investigation, the money related position of the organization could

enhance fundamentally throughout the following two years if the bank kept up or even

expand the credit lines. Once the new office is goes on the web, the organization would have

the capacity to build yield in quickly growing(and especially beneficial) horse van and home

body section of the business furthermore lessen the reliance on ranch and light utility trailer

deals to 35% or less. He additionally anticipated that the business development would be 6%

and 9.5% in a normal for 2006 and 2007 individually, expecting there is no huge change in

either national or homestead economy. He likewise expected that SRM would change its

strategy of forceful advertising and deals advancement and come back to full edge costs,

standard industry credit term and more tightly credit benchmarks. These progressions would

decrease expense of products sold to 85% in 2005 and 82.5% in 2006 and 80 % in 2007.



Correspondingly regulatory and offering costs are liable to diminish from 9% to 8% in 2006

and 7.5% in 2007. Additionally, the various costs would decrease to 1.75% and 1.25% of

offers in 2006 and 2007 individually. Normal gathering period and stock turnover will be

kept up at normal industry level.

With respect to money related information gave for the situation and the anticipated salary

articulation and asset report, we need to break down whether SRM is qualified to get the

bank credit. Presently, the inquiry is whether the bank ought to broaden the current short and

long haul credits or ought to rather request quick reimbursement of both existing advances.

What's more, we need to propose options accessible to SRM if the bank were to choose to

withdraw the whole line of credit and to request quick reimbursement of the two current

advances.

The best way to stop SRM to go in bankruptcy is to persuade the senior credit board of

trustees with solid and persuading proof that Silver River assembling present challenges were

impermanent in nature. That suitable activities intended to beat the issue had been taken, and

that the chance for accomplishment in turning around the pattern was reasonably great.



2. Sources and Uses

Table 6: Silver River Manufacturing Company

Statement of Changes in Financial Position Year Ended December 31 (Thousands of

Dollars)

Particulars 2004 2005Sources of Fund Net Income after taxes 6,987.24 830.44 Depreciation 1,823.00 2,244.00 Funds From Operations 8,810.24 3,074.44 Long Term Loan 3,506.00 - Net Decrease in Working Capital - (471.00)Total Sources 12,316.24 3,545.44

Applications of Funds Mortgage Changes 295.00 287.00 Fixed Assets Changes 2,573.00 3,051.00 Dividend on Stock 1,746.81 207.61 Net Increase in working Capital 7,701.00 - Total Uses 12,315.81 3,545.61 Analysis of changes in Working Capital Increase/ Decrease in Current Assets Cash Change (1,260.00) (107.00)AR Change 1,500.00 11,985.00 INV Change 15,505.00 14,992.00 CA Changes 15,745.00 26,870.00

Increase/ Decrease in Current Liabilities AP Changes 4,117.00 10,441.00 NP Changes 2,104.00 14,446.00 ACC Changes 1,823.00 2,454.00 CL Changes 8,044.00 27,341.00 Net Increase/ Decrease in Working Capital 7,701.00 (471.00)

Funds flow statement, table: 6 shows changes or movement of funds or changes in working

capital of Silver River Manufacturing Company. The net sales have a significant increase of

$12181 during the year (2004-2005). The company also made a profit of $183307 during the

year 2005 which exceed the profit for the year 2004. However, the company has also incurred



additional cost in 2005 as compared to the previous year. Even if the company has made a

significant increase in their sales in 2005 as compared to 2004, it fails to improve the net income.

There was a huge gap between the net incomes for the two consecutive years. It can be said that

the high increase in the cost part has made the company lost their net income. Hence, the bottom

line is the uses of the funds exceeded the source of fund.



Issue 1b: Computation of ratio and analysis


Ratio Analysis Year Ended December 31

Particulars 2003 2004 2005 Industry

Average

Comment

for 2005

Liquidity Ratios

Current ratio

Quick ratio

Leverage ratios

Debt ratio (%)

Times interest earned

Assets management ratios

Inventory turnover ( Cost)inventory

turnover ratio (Selling)b

Fixed assets turnover

Total assets turnover

Average collection period

Profitability ratios

Profit margin (%)

Gross profit margin (%)

Return on total assets

Return on owner’s equity

Potential failure indicator

Altman Z factor I

3.07

1.66

40.46

15.89

7.14

9.03

11.58

3.06

36.00

5.50

20.89

16.83

28.26

3.93

2.68

1.08

46.33

7.97

4.55

5.59

11.95

2.60

35.99

3.44

18.70

8.95

16.68

3.49

1.75

0.73

59.8

1.49

3.57

4.19

12.1

2.04

53.99

0.39

14.86

0.79

1.95

2.68

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

1.81/2.99

Poor

Poor

Poor

Very Poor

Poor

Very Poor

Very Good

Poor

Very Poor

Very Poor

Poor

Very Poor

Very Poor

Poor



Current Ratio

Current Ratio is also known as the liquidity ratio. It measures the company’s ability to pay short

term obligations. The current ratio is the financial ratio that measures whether or not a firm has

enough resources to pay its debts over the next 12 months. It is a liquidity and efficiency ratio

that measures a firm’s ability to pay off its short term liabilities with its current assets. The

example of current ratio is cash, account receivables, prepaid expenses etc. Current ratio is the

ratio of current assets of a business to its current liabilities.

Current Ratio =Current Assets/ Current Liabilities

For 2005

Current ratio = 87913/50118 =1.7541

2005 2004 20030

0.5

1

1.5

2

2.5

3

3.5

Current Ratio

Current Ratio Industry Average

Current ratio is 1.75 in 2005 which is not good.It implies that paying capacity and conversion

into cash is very low of the company.But the industry liquidity ratio is good.



Quick Ratio

Quick Ratio is also known as the acid ratio, which shows the ratio of cash and other liquid

resources of an organization in comparison to its current liabilities. It measures a company’s

ability to meet its short term obligation with its most liquid assets. It is the ratio of sum of cash

and cash equivalent, marketable securities and account receivables to the current liabilities of a

business. It measures the ability of company to pay its debt by using its cash and near cash assets

i.e. account receivables and marketable securities. Marketable securities are those which can be

converted into cash quickly.

Quick Ratio = Current Assets – Inventory - Prepaid

Current Liabilities

For 2005

Quick ratio=36589/50118 =0.7301

2005 2004 20030

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8Quick Ratio

Quick Ratio Industry Average



The quick ratio is also not good enough. It is 0.73 which shows quick assets proportion is less

than the current liabilities.

Debt Ratio

Debt Ratio is also known as the Financial Ratio. It is a solvency ratio that measures a firm’s total

liabilities as a percentage of its total assets. In sense, it shows the company’s ability to pay. It is

the proportion of a company’s debt to its total assets. It indicates the proportion of a company’s

debt to its total assets. It can be measured as:

Debt Ratio = Total Debt/ Total Assets

For 2005

Debt ratio= LTD+TCL/TA =13092+50118/105711 =59.80

2005 2004 20030

10

20

30

40

50

60

70

Debt Ratio (%)

Debt Ratio Industry Average



Debt ratio is not satisfactory average ratio is 48.46 which is slightly below than the industry

average.

Time Interest

Time Interest Earned Ratio is also known as the Interest Coverage Ratio. It is a measure of how

well a company can meet its interest payment obligations. It is the ratio of earnings before

interest and tax.

Time interest: =EBIT/Interest

=4888/2006+1052+233 =1.4853

2005 2004 20030

2

4

6

8

10

12

14

16

18

Times Interest Earned

Times Interest Earned Industry Average

The time interest earn ratio is 8.44 but the industry average ratio is 7.70 which is not good to

company.

Inventory Turnover



In Accounting, Inventory Turnover is a measure of the number of times inventory is sold or used

in a time period such as a year. The equation for the inventory turnover equals the cost of goods

sold divided by the average inventory. It shows how many times a company’s inventory is sold

and replaced over a period of time. It is a key measure for evaluating just how efficient

management is at managing company’s inventory and generating sales from it.

Inventory Turnover (cost) = Cost of goods sold

Average Inventory

For 2005

Inventory Turnover (cost) =183307/51324 =3.57

2005 2004 20030

1

2

3

4

5

6

7

8

Inventory Turnover Cost

Inventory Turnover Cost Industry Average

Looking towards the Assets management ratios the average inventory turnover (cost) ratio is

5.08 times. But actual average is 5.70.Here not so much difference so it seems to be nice.

Inventory Turnover (sales): Sales/Avg. Inventory

=215305/51324 =4.20times



2005 2004 20030

1

2

3

4

5

6

7

8

9

10

Inventory Turnover Selling

Inventory Turnover Selling Industry Average

Inventory turnover ratio at selling 6.27 times but the actual must be 7 so inventory turnover ratio

at selling is not good enough.

Fixed Assets Turnover Ratio

Fixed Assets Turnover Ratio is the ratio of sales to the value of fixed assets. It indicates how will

the business is using its fixed asset to generate cash. The higher, the ratio is better because a high

ratio indicates the business has less money tied up in fixed assets for each unit of currency of

sales revenue. A declining ratio may indicate that the business is over invested in plant,

equipment or other fixed assets.

Fixed Asset Turnover = Sales/ Fixed Assets

For 2005

Fixed Assets Turnover =215305/17798 =12.10



2005 2004 200311.3

11.4

11.5

11.6

11.7

11.8

11.9

12

12.1

12.2

Fixed Assets Turnover

Fixed Assets Turnover Industry Average

Fixed assets turnover ratio is 11.87 times.But there must be 12 times,not so much difference it is

good for the company.

Total Assets Turnover

Assets Turnover is the financial ratio that measures the efficiency of a company’s use of its

assets in generating sales revenue or sales income to the better company. Companies with low

profit margin tend to have high assets turnover. Other hand, those which have high profit margin,

they have low asset turnover. Companies in retail industry tend to have a very high turnover ratio

mainly because of competitive pricing.

Assets Turnover = Sales/ Total Asset

For 2005

Total Assets Turnover =205305/105711 =2.04



2005 2004 20030

0.5

1

1.5

2

2.5

3

3.5

Total Assest Turnover

Total Assets Turnover Industry Average

Total assets turnover ratio is 5.68 times. Actual must be 3 times. So the total assets turnover is

not good enough.

Average Collection Period

Average Collection Period is the average number of days between the date that a credit sale is

made and the date that the money is received from the customer. The average collection period is

also referred to as the day’s sales in account receivable. An Alternate way to calculate the

average collection period is the average account receivable balance divided by average credit

sales per day.

ACP = Days in a year * debtors

Sales

For 2005

Average Collection Period: =360*32293/205305 =54days



2005 2004 20030

10

20

30

40

50

60


Average Collection Period Industry Average

Average collection period is 42 days which is not acceptable.The actual must be 32 days but

receivables are collected lately than its time.So this is also the bad situation for the company.The

cash collected fast means the company will get more benefit in the future but if collection are

lately than company loose the opportunity to invest.

Profit Margin

The profit margin is an accounting measure designed to gauge the financial health of a business

or industry. In general, it is defined as the ratio of profits earned to total sales receipts over some

defined periods. A ratio of profitability calculated as net income divided by revenues or net profit

divided by sales. It measures how much out of every dollar of sales a company actually keeps in

earning. It is a measure of profitability which is calculated

by findings the net profit as a percentage of the revenue. A ratio of profitability is calculated as

net income divided by sales.

Profit Margin = Net Income

Sales

For 2005

Profit Margin: =831/215305 =0.3860%



2005 2004 20030

1

2

3

4

5

6

Profit Margin %

Profit Margin Industry Average

The profit margin ratio is 3.10 %.It is good than the actual profit margin.

Gross Profit Margin

Gross Profit Margin Ratio is also known as the Gross Profit Percentage. Gross Margin Ratio is

computed by dividing the company’s gross profit dollars by its net sales dollar. A company

should be continuously monitoring its gross margin ratio to be certain which will results in a

gross profit that will be sufficient to cover its selling and administrative expenses.

Gross Profit Margin = Gross Profit

Sales

For 2005

Gross Profit Margin =31998/215305 =14.86



2005 2004 20030

5

10

15

20

25

Gross Profit Margin %

Gross Profit Margin Industry Average

Gross profit margin ratio is 18.75% which is actually good for the company.

Return on Total Assets

Return on total assets is the ratio of annual net income to average total assets of a business during

a financial year. It is a profitability ratio that measures the net income produced by total assets

during a period. It provides valuable information to value investors searching for the quality

companies. It gives an indication of the capital intensity of the company, which will depend on

the industries, companies that require large investments. It is calculated as company’s net income

divided by its average of total assets.

Return on total assets = Net Income

Total Assets

For 2005

Return on Total Assets =831/105711 =0.786%



2005 2004 20030

2

4

6

8

10

12

14

16

18

Return on Total Assets %

Return on Total Assets Industry Average

The return on assets is 8.85 which seem to be good enough because the actual return also the

8.80.

Return on Owner’s Equity

ROE is a profitability ratio that measures the ability of a firm to generate profits from its

shareholder’s investments in the company. Investors must calculate ROE for a period by first

using the shareholder’s equity figure from the beginning of a period as a denominator. It is the

amount of net income returned as a percentage of shareholder’s equity. It tells us how much

profit a business earned in comparison to the book value of its owner’s equity.

ROE = Net Income

Owner’s Equity

For 2005

Return on Owners Equity: =831/42500 =0.0195 =1.95%



2005 2004 20030

5

10

15

20

25

30

Return on Owners Equity %

Return on Owners Equity Industry Average

The return on equity is 15.67 which is less than the actual ROE that is 17.50.It implies that the

return on equity is slightly lower than actual.So they need to increase the capital by issuing the

shares.



3. Analysis of Strength and weakness

DuPont analysis is an extended analysis of a company's return on equity (ROE). It concludes that

a company can earn a high return on equity if:

1. It earns a high net profit margin;

2. It uses its assets effectively to generate more sales; and/or

3. It has a high financial leverage

ROE =Profit margin=( Net income

Net sales ) × Total Assets Turnover

( Net salesTotal assets )

× Leverage factor

( Total assets

Owner' s equity )2003 28.24 = 5.5 × 3.06 × 1.68

2004 16.69 = 3.44 × 2.6 × 1.86

2005 1.98 = 0.39 × 2.04 × 2.49

Industry 17.50 2.9 3.00

2003: 10355/188097*188097/61539*61539/36637

=0.0551*3.0568*1.6796

=0.2824

2004: 6987/203124*203124/78034*78034/41877

=0.0344*2.6030*1.8634

=0.1669

2005: 831/215305*215305/105711*105711/42500



=0.0039*2.0367*2.4873

=0.0198

In Du Pont system ROE is calculated. In the company net profit margin declines from 2003 to

2005.The total assets turnover also decrease from 2003 to 2005.But the equity multiplier increase

from 2003 to 2005.Overall the ROE decline. It represents that the DU Pont system also not good

ROE declines slowly that is in 2003 ROE 0.28, in 2004 ROE 0.17 in 2005 ROE 0.0198.So in the

Overall the financial position of the company is worse.



Altman's Z- Scores

A Z- Scores is a statistical measurement of a score’s relationship to the mean in a group of

scores. A Z-score of 0 mean is same as the mean. It can also be positive or negative, indicating

whether it is above or below the mean and by how many standard deviations. It represents the

distance between the raw score and the population mean in units of the standard deviation. Z is

negative when the raw score is below the mean and positive when above the mean.

Calculation of Z-scores

For 2003

X1 = (CA-CL)/TA =(45298-14733)/61539 = 49.67%

X2 = Retained Earning/Total Assets =11041/61539 =17.94%

X3 = EBIT/TA =21251/61539 =0.3453times

X4:

ME = No. of Shares Outstanding * Market value of share =3849.44*17.79 =68481.54

No. of Sales o/s = NI/EPS =10355/2069 =3849.44

BV = 24901

SO, X4 =ME/BV =68481.54/24901 =2.75

X5 = Sales/TA =188097/61539 =3.0565times

For 2004

X1 = (61043-22777)/78034 =49.0376%

X2 = 16282/78034 =20.87%

X3 = 15364/78034 =0.1969times

X4:

ME = 3860.22*9.64 =37405.53

No. of Share o/s =6987/1.81 =3860.22



BV =36156

So, X4= 37405.53/36156 =1.03

X5= 203124/78034 =2.6030times

For 2005

X1 =(87913-50118)/105711 =35.75%

X2 =16904/105711 =15.94%

X3 =4888/105711 =0.0462times

X4:

ME =3777.27*1.02 =3852.82

No. of Share o/s =831/0.22 =37777

BV =63211

X4=ME/BV= 3852.82/63211 =0.06

X5 =215305/05711 =2.0367times

Z-Score

2003

Z = 0.0012*49.670+0.014*17.94+0.033*0.3453+0.006*2.75+0.0999*3.0565

=3.93

2004

Z =0.12*49.04+0.014*20.68+0.033*0.20+0.006*1.03+0.999*2.60

=3.49

2005

Z = 0.012*49.04+0.014*15.94+0.033*0.462+0.006*0.06+0.999*2.0367

=2.6887



The Altman Z factor range of 1.81-2.99 represents the so-called “zone of ignorance". It means

that the company range lies between 1.81 and 2.99 Z factor than it is very difficult to predict the

company whether it is in bankruptcy or not. If company lies below the 1.81 Z factor than

company is in a bankruptcy stage. If the company Z factor lies above the 3 that represents the

company is in expansion stage non failure stage. In the company at 2003 the Z score is 3.93 that

show the company is in good condition. In 2004 the company has 3.49 Z score that also

represent good condition of the company but it is below than previous. In the 2005 Z score is

2.68 that indicate the company moves slowly to bankruptcy stage. They need certain changes in

the company.



Issue 3: Projection of Financial Statements 2006 & 2007 and analysis


Pro Forma Income Statements (Projected) Worksheet for Year End 2007(Thousands of

Dollars)

Particular 2005 2006 (Projected) 2007 (Projected)

Net Sales 215,305.00 228,223.30 249,904.51

Cost of goods sold 183,307.00 188,284.22 199,923.61

Gross Profit 31,998.00 39,939.08 49,980.90

Admin & Selling Exp 18,569.00 18,257.86 18,742.84

Depreciation 2,244.00 2,665.00 2,006.00

Misc Expenses 6,297.00 3,993.91 3,123.81

Total Operating Expenses 27,110.00 24,916.77 23,872.64

EBIT 4,888.00 15,022.31 26,108.26

Interest on Short Term Loan 2,006.00 4,331.00 4,331.00

Interest on Long Term Loan 1,052.00 1,052.00 1,052.00

Interest on Mortgage 233.00 210.00 189.00

EBT 1,597.00 9,429.31 20,536.26

Tax @48% 766.56 4,526.07 9,857.40

Net Income 830.44 4,903.24 10,678.85

Dividend on Stock 207.61

Addition to RE 622.83 4903.24 10678.85



Net sales growth rate in 2006 by 6% based on 2005 year and 2007 net sales growth rate 9.5%

based on 2006 year sales, company maintain cost of goods sold in 2006 and 2007. Cost of goods

sold for 2005 is 85% in 2006, 82.5 % and in 2007, 80 % company want to maintain its COGS

lower with increase in sale. Project gross profit also increases in 2006 and 2007 by 17.5% and

20% with increase in sales and decrease in cost of goods sold. Company expected to reduce

administrative and selling expenses 9% in 2005, 8% in 2006 to almost 7.5% in 2007 and also

sufficient reduce in miscellaneous expenses 1.75% in 2006 and 1.25% in 2007. Sufficient

improvement lead to increase EBIT 15022.31 in 2006 and 23872.64 in 2007 it is good

improvement from 2005 EBIT 4888. Net income also increases in 2006 and 2007 and also

company maintain its dividend payment 25% in projected year.



Table10: Silver River Manufacturing Company

Particulars 2005 2006 Projected 2007 Projected

Assets

Cash

Accounts receivable

Inventory

Current assets

Land, buildings, plant, and

equipment

Accumulated deprecation

Net fixed assets

4296

32293

51324

87913

25161

(7363)

17798

22791.4

20286.52

33032.32

78854.43

32173

(10028)

22145

26144.04

22213.73

35074.32

83432.14

33139

(12033)

21106

Total assets 105711 98225.24 104538.14

Liabilities and equities

Short-term bank loans

Account payable

Accruals

Current liabilities

Long term bank loans

Mortgage

Long term debt

Total liabilities

20056

21998

8064

50118

105118

2574

13092

63211

27068

17594

10231

54894

10519

2314

12833

67727

27068

18474

12789

58331

10519

2083

12602

70933



Common stock

Retained earnings

Owner’s equity

25596

16904

42500

25596

3677.43

29273.43

25596

8009.14

33605.14

Total capital 105711 9822524 104538.14

The cash position of projected in 2006 and 2007 year is sufficient to maintain 5% of sales shows

the collection of cash in the company. Inventories and account receivable also maintain on

industry level. Current assets also increases which is good for the company. The increase in land

and building shows the purchase of land and building. Fixed assets position is also satisfactory in

the company. The overall total assets are increase in the company. It is good for the company.

Looking towards the Liabilities short term bank loans increase and remains same in 2007.The

accounts payable is decrease that shows the company pays the cash to suppliers and creditors.

The outstanding expense increase that shows the company have due expense to be paid. The

overall current liabilities are increase. The long term loan decrease that indicate the payments of

long term debt and remains same in 2007.The common stock remain the same that means the

company didn’t issue further more shares in the company. The retain earnings also increase from

2005 t0 2007.It indicate that the company earn more profit. The owner’s equity also increases.

The total liabilities also increase in the company. The overall financial position is good in the

company. The company has a chance to take benefit from the future.



Projection of Financial ratios 2006 & 2007 & Analysis


Ratio Analysis Year Ended December 31, 2007 (Projected)

Particulars 20052006 (Projected)

2007 (Projected)

Industry Average

Current Ratio 1.75

1.36 1.43 2.50

Quick Ratio 0.73

0.76 0.83 1.00

Leverage Ratios

Debt ratio (%) 59.80

69.82

67.85 50.00

Times Interest earned 1.49

2.69 4.69 7.70

Assets Management Ratios

Inventory Turnover Cost 3.57

5.70 5.70 5.70

Inventory Turnover Selling

4.20

6.91 7.13 7.00

Fixed Asset Turnover 12.10

10.31

11.84 12.00

Total Asset Turnover 2.04

2.35 2.39 3.00


54.00

32.00

32.00 32.00

Profitability Ratios

Profit Margin (%) 0.39

2.15 4.27 2.90

Gross Profit Margin (%) 14.86

17.50

20.00 18.00

Return on total assets (%)

0.79

5.05

10.22 8.80

Return on owner’s equity (%)

1.95

16.75

31.78 17.50



The current ratio of the company for the year 2005 was 1.75 and the current ratio of industry

average in the year 2007 was 2.50. It means that the company is being more capable to pay its

short term obligation. Quick ratio is also seems as increasing from 0.63 to 1.00. That means, the

cash and cash equivalent was increasing in the company, the liquidity capacity is increased. Debt

ratio seems to be reduced from 59.8 to 50, time interest earned is increasing. Inventory turnover

cost is increasing. Fixed assets when set at once, it remains for the various years. So, the fixed

assets turnover is reducing.

Talking about profitability ratio, the profit margin, gross profit margin, return on total assets,

return on total equity, these all are in increasing way. That means, the company’s profit is

increasing year by year the return we get from the shareholder’s investment and from the total

assets is increasing. By analyzing this ratio, it is concluded that the situation of the company is in

enhanced situation. The company is in the growth condition. The capacity of company, its

market occupancy is increasing by the year. Therefore, it is concluded that the company is in

better situation.



Issue 5: Revision of income statement and analysis


Pro Form Income Statements (Revised)

Worksheet for Year End 2007 (Thousands of Dollars)

Particular 2005 2006 (Revised) 2007 (Projected)

Net Sales 215,305.00 228,223.30 249,904.51

Cost of goods sold 183,307.00 188,284.22 199,923.61

Gross Profit 31,998.00 39,939.08 49,980.90

Administrative & Selling Exp 18,569.00 18,257.86 18,742.84

Depreciation 2,244.00 2,665.00 2,006.00

Misc Expenses 6,297.00 3,993.91 3,123.81

Total Operating Expenses 27,110.00 24,916.77 23,872.64

EBIT 4,888.00 15,022.31 26,108.26

Interest on Short Term Loan 2,006.00 2165.00 -

Interest on Long Term Loan 1,052.00 1,052.00 1,052.00

Interest on Mortgage 233.00 210.00 189.00

EBT 1,597.00 11595.31 24,867.26

Tax @48% 766.56 65565.75 11,936.28

Net Income 830.44 6099.56 12,930.97

Dividend on Stock 207.61 - -

Addition to RE 622.83 6099.56 12,930.97



Revised pro forma income statement show the net profit changes of the company in 2006 and

2007 after paying short term loan. Sales, cost of goods sold, gross profit, selling and

administrative expenses, depreciation, miscellaneous expenses no changes from projected

income statement. Company paid short term loan in earlier in 2006 so company pail only 2165

and there is no interest on short term loan in 2007. Comparing to project income statement there

no change in EBIT but in revised income statement income of the company is lower. After

paying short term Loan Company failed to paid dividend to its shareholder because of in

sufficient cash balance. Retained earnings also decline in revised income statement compare to

projected balance sheet.



Revision of balance sheet and analysis

Table 13: Silver Mountain Manufacturing Company

Pro Forma Balance Sheets (Revised)

Worksheet for Year End 2007 (Thousands of Dollars)

Particulars 2005 2006 (Revised) 2007 (Revised)

Assets

Cash

Accounts receivable

Inventory

Current assets

Land, buildings, plant, and equipment

Accumulated deprecation

Net fixed assets

4296

32293

51324

87913

25161

(7363)

17798

-

20286.52

33032.32

53318.84

32173

(10028)

22145

3997.92

22213.73

35074.32

61285.97

33139

(12033)

21105

Total assets 105711 75463.84 82391.97

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

20056

21998

8064

50118

105118

2574

13092

63211

25596

16904

-

17594

13411.28

31005.28

10519

2314

12833

43838.28

25596

6029.56

-

18474

12789

31263

10519

2083

12602

43865

25596

12931.97



Owner’s equity 42500 31625.56 38526.97

Total capital 105711 75463.84 82391.97

In revised year 2006 and 2007 company failed to paid dividend to its shareholders retained

earnings also lower compare to projected year 2006 and 2007. SRM also failed to maintain its

5% cash position. Company paid short term loan earlier in 2006 so company can't maintain the

cash position and also increase its accrual to make balance of assets and liabilities but in 2007

company maintain cash $3997 but it is also lower to 5% company standard.



Revision of financial ratio and analysis


Ratio Analysis Year Ended December 31 (Revised)

Particulars 2005 2006 (Revised) 2007 (Revised)Industry Average

Current Ratio 1.75 1.78 1.96 2.50

Quick Ratio 0.73 0.68 0.84 1.00

Leverage Ratios

Debt ratio (%) 59.80 56.60 53.24 50.00

Times Interest earned 1.49 11.90 21.04 7.70

Assets Management Ratios

Inventory Turnover Cost 3.57 5.70 5.70 5.70

Inventory Turnover Selling 4.20 6.91 7.12 7.00

Fixed Asset Turnover 12.10 10.31 11.84 12.00

Total Asset Turnover 2.04 3.02 3.03 3.00

Average Collection Period 54.00 32.00 32.00 32.00

Profitability Ratios

Profit Margin (%) 0.39 3.14 5.17 2.90

Gross Profit Margin (%) 14.86 17.50 20.00 18.00

Return on total assets (%) 0.79 9.48 15.69 8.80

Return on owner’s equity (%) 1.95 21.85 33.56 17.50



Current Ratio

Current Asset/Current Liabilities

Current ratio of revised (Table: 14) shows not good position of SRM in 2006 of 1.78 and 2007

of 1.96 than that of in projected (Table: 11). Current ratio in 2006 and 2007 is lower than of

industry average of 2.50.

Quick Ratio

(Cash + Marketable Securities + Trade Accounts Receivable) / Current Liabilities

Quick ratio in 2006 and 2007 revised of 0.68 and 0.84 respectively no different because of higher

volume of inventory. This show both revised years 2006 and 2007 quick ratios is less than

industry average of 1.00 and after paying short term loan no different in quick ratio.

LEVERAGE RATIOS

Debt Ratio

Total Liabilities / Total Assets

Debt ratio is in both years 2006 of 56.60% and 2007 of 53.24% revised slightly lower than

projected. This shows low risk at revised than projected. Comparing this ratio with industry

average of 50.00% SRM shows higher risky in term of debt financing in its investing activities.

Times interest earned ratio

(EBIT/Total Interest)

Times interest earned ratio in both year of revised 11.90 and 21.05 in 2006 and 2007 respectively

show stronger ability of SRM to make interest payment out of its EBIT than that of projected. In

2006 SRM would be paying interest for first half of the year so this ratio seems to be high and

than of industry average of 7.70. Then in 2007 firm’s ability to meets its current interest

increases to about 3 times of the industry average. This shows SRM strong ability to pay interest

of reaming debt.



Asset management ratios

Comparing ratios of projected and revised plan, there is no much difference. As inventory and

average collection period is maintained as per industry average. But we can see difference in

total assets turnover ratio, 2006 of 3.02 and 2007 of 3.03 shows efficient management of total

assets than of projected. This ratio in revised is also higher than industry average of 3 we can see

improved management of total assets in revised.

PROFITABILITY RATIOS

Profit margin: Profit margin significantly increases in both 2006 and 2007 to 3.14 and 5.17

respectively in revised plan than that of projected. This shows more return from sales in revised

than projected plan. Comparing profit margin of revised with industry of 2.90 its shows fair

return in 2006and improved or more return in 2007.

Gross profit: Gross profit margin in 2006 and in 2007 respectively 17.50 and 20 it shows the

gross profit is improving from year 2005 and in 2007 GPM is higher than industry level that is

20.

Return on total assets : Return on total assets in higher in both revised years 9.48 in 2006 and

15.6 in 2007 than that of in projected. Compared with industry average of 8.80 we can see

significant increase and more return in total assets in both year.

Return on owner's equity: Return on owners’ equity is also higher in both the years of revised

of 21.85 in 2006 and 33.56 in 2007. This shows higher return over investment in revised than

projected. Industry average of 17.50 indicating higher return in both year 2006 and 2007

investors can have significant amount of return over their investment as this ratio is higher than

industry average.



Issue 6: Decision based on Resources

The overall analysis of the financial statements and financial ratio suggest that the bank should

extend the existing short and long-term loans and grant the additional $7012500 loan. The key

financial indicators of the company is such as current ratio, time interest earned, inventory

turnover, profitability ratio, ROA, ROE are being well improved whilst the debt ratio, collection

period are declining as the projections of the SRM were materialized. The SRM has attained a

good reputation from its previous performance and maintained its trustworthiness to the Bank.

This indicates a strong advantage for the company. So, the bank should grant and extend the

loan. We have following reasons to support our recommendation:

a. The reputation in the market along with its past performance.

b. The external environment (Climate and other macro factors) is the one that has

affected the company performance. The operation part of the company has a positive

impact. So. The bank can understand the situation to extend the loan.

c. The analyses made by Mr. White suggest that the financial position of the company

could improve significantly over the next two years. Shifting from policy of

aggressive marketing and sales promotion to full margin prices, standard industry

credit term and tighter credit standards would reduce the cost of goods sold.

Similarly, he is also planning to minimize administrative and selling expense and

miscellaneous expenses in the coming two years.

d. The projected growth rate of 6% and 9.5% in sales on an average for 2006 and 2007

respectively, assuming there is no significant improvement in either national or farm

economy. This condition is also likely to strengthen their chances of making the debt

payments.

e. SRM’s projected Altman Z factor is increasing and is above 3 for the years 2006 and

2007 which shows the less chances of company going bankrupt in future.



Analyzing the projected financial statements, it seems that the company will improve its

financial positions if all the projections are materialized, if all the projections are materialized

company will surely grow its financial position reflected by financial statements. Considering the

above reason, the bank should grant and extend the existing loan. However the bank can use its

safeguarding tools to make its loan safe. Such as

a. Security

A financial instrument that represents: an ownership position in a publicly-traded

corporation (stock), a creditor relationship with governmental body or a corporation

(bond), or rights to ownership as represented by an option.

b. Mortgage

A debt instrument, secured by the collateral of specified real estate property, that the

borrower is obliged to pay back with a predetermined set of payments.

c. Guarantee

In general, a financial guarantee is a promise to take responsibility for another

company's financial obligation if that company cannot meet its obligation. The entity

assuming this responsibility is called the guarantor. It is non-cancellable indemnity bond

that is backed by an insurer in order to guarantee investors that principal and interest

payments will be made.

d. Insurance

A commercial contract agreeing to compensate one for loss in the event of specifically na

med or described risks.


http://www.investinganswers.com/financial-dictionary/debt-bankruptcy/guarantor-5271

http://www.investinganswers.com/financial-dictionary/laws-regulations/obligation-3919


Issue 7: Alternative

It will be intense choice for SRM to make if bank request quick reimbursement of two current

short and long terms loans. Its aggregate advance in 2005 is $27795. It would be smart thought

to offer some of its value as shares are exchanging at $1.02 in business sector. Book estimation

of value in 2005 is 38,636.72 however it has come to just $3570 in business sector along these

lines, it may not be best alternative. The choice left for the SRM Company will be to change over

money equal advantage for money and pay the credit as requested by the MCNB. As it is clear

that silver river manufacturing organization whose stock is exchanged over the counter is a huge

local maker of homestead and utility trailers, particular trained animals transporters and

manufactured home body was financially solid before 2003. Hence, the president of the

organization was ignoring the genuine circumstance of the organization. As indicated by the lack

report, which uncovered various significant issue in the money related status of silver river

manufacturing organization ,especially that of flow proportion, speedy and obligation proportion.

So as to maintain benefits and unrivaled business sector execution Mr. White forcefully

diminished costs to strengthen further deals. This SRM as well as, offered more good credit

terms and loose credit guidelines. Therefore, creation proceeded with unrestricted and

inventories began expanding. This action of Mr. White increased sales through the third quarter

of 2005, but inventories also increased steadily and particularly short-term credits and accounts

receivable grew up dramatically.

Consequently, on the off chance that if the bank withdraws the whole line of credit and requests

prompt reimbursement of the two current advances, SRM can receive taking after activities like:

• Sale of assets:

In the event that all of above alternatives neglect to meet the credit reimbursement,

SRM can sell distinctive resources of the organization which can help to pay prompt

reimbursement of the advance .These advantages may incorporate vehicles, land,

ventures, market securities and so forth.



Minimize stock level:

Minimizing the stock level means the increment of trade stream in for cold hard currency the

organization which offers distinct option for pay the credit. SRM has colossal measure of

stock of $46658.62. Indeed, even just half change of its stock can meet practically parcel of

bank credit.

Make strict gathering approaches:

The normal gathering time of SRM is 57 days in 2005. The organization needs to make

its gathering arrangements stricter so that the borrowers will pay in time. Here, SRM is

receiving liberal accumulation strategies.

Take home loan advance from bank:

SRM has land, structures, plant and gear worth of $ 22873.5 and it has contract worth of

$ 2339.62. This mirrors that SRM has the ability to contract its property and structures.

Thus, it can demand credit with another bank selling its property and structure.

Focus on benefit creating items

SRM ought to concentrate on more benefit creating items like grain generation and

attempt to bit by bit lessen or suspend vegetable harvest. That is to reorientation of the

generation blend far from the very unpredictable ranch part towards the more steady

medium to high development markets.

Invite new accomplices:

It can build the liquidity by issuing the offer to different accomplices. Accomplice's

expansion can help to get money for venture.

Reducing the uses:

Lessening superfluous uses can help to minimize the expense. At the season of

deficiency, money can be overseen by decreasing the irrelevant costs. Case in point it can

lessen the forceful expense and different deals advancement exercises.



8. Lesson Learnt

Examining the entire instance of Silver River Manufacturing Company, we now take in the

accompanying lessons as:

• To comprehend the center reasons for quality and shortcoming of the

organization.

• To have the capacity to investigate the organization's money related condition in

view of various types of proportions.

• Market and economies gauge ought to be done examination every single

conceivable variable.

• Just increment in deals, resources and benefit doesn't give the reasonable picture

about organization's execution.

• Prices of merchandise must not be decreased to build the interest and piece of the

overall industry without doing fitting investigations.

• Debt financing obviously give influence to organization however it ought to keep

up to certain extent, if obligation proportion surpasses past it have danger to

organization, Company can likewise turn chapter 11.

• Over-confidence, thinking great times are constantly practically around the bend

may obfuscate the reasoning and may misdirect the organization if business

gauges turned out badly.

• Sales development and high piece of the pie may not be the entire response to the

topic of maintained long-run gainfulness. This technique can just work when it is

conceivable to protect sensible overall revenue.

• Sometime firm may need to change the old strategy and take solid choice that

may even incorporate chopping down expenses ending a portion of the staffs.

• We additionally learn analyzing the financial report of the firm.

• To have the capacity to see the diverse corner of the money related proclamations

of the organizations


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