A Case Study

On
Silver River Manufacturing Company

MBA Finance,
18th Batch
Sec B, Group 1

Submitted to: Submitted by:

Prof. Dr. Radhe Shyam Pradhan. Ashmita Sunam

Kamlesh Singh
Prakash Pathak
Pramila Pant
Pratikshya Pokhrel
Puja Shah
Rakshya Oliya
 ACKNOWLEDGEMENTS
It's a great pleasure to present this report of case study on “Silver River Manufacturing
Company”. At the outset, we would like to express our immense gratitude to our group members
for the inception till the successful completion of this case.

We are extremely thankful to Prof. Dr. Radhe Shyam Pradhan for extending his valuable
guidance about the analysis of financial statements concerned with this case, and his support for
literature, critical reviews of case and the report.

We would also like to thank our all our group members for their sincere effort and cooperation
throughout the analysis of this case. Above all we would like to thank everyone for the moral
support. We are indebted to all group members for their time & passion during the case analysis,
without such efforts, work could not have been accomplished on time.

1
General Background
Silver River manufacturing company (SRM) is a US based large regional farm and utility trailer
manufacturer specialized in livestock carriers and mobile home chassis. SRM is owned by Greg
white. It depends on famers for roughly 45 to 50% of its total sales. More than 85% SRM’s sales
come from the Southeastern part of the United States. Several major boat companies in Florida
work closely with SRM in designing trailers for their new offering and this boat trailer package
and sold through the national wide dealer network of the boat companies. SRM is a major client
of Marion Country National Bank (MCNB). In 2010 the nations farm economy had been plagued
that caused recession. The total sales of the farmer decrease from roughly 45% to 50%. It creates
problem for Silver River Manufacturing Company. On the top of this, disastrous freezes for two
straight winters had devastated Florida’s citrus and vegetable industries, with few exceptions.
SRM products are totally based on latest technology and SRM hold several patents with which it
can partially offsets some of the risk.
In the decade prior to 2013, SRM had experienced high and relatively steady growth in sales assets
and profits. Towards the end of 2013 the demand for new field trailers in the citrus and vegetable
industries started to fall off. White aggressively reduce prices to stimulate further growth sales and
to reduce the ever-expanding inventories, SRM not only reduce price but also part of an integrated
market penetration plan offered more favorable credit term and relaxed credit standard. Lesa Nix
vice president of the Marion Country National Bank (MCNB) and member of the banks. Senior
loan committed. Despite of such adverse condition Nix considered the company to have good long
run prospects assuming, of course that management reacted immediately and appropriately to the
current situation. Nix looked upon the threat of accelerating the loan repayment primarily as a
means to get Greg white’s undivided attention and to force him to think about corrective action
that must be taken at once to reverse the determination and to correct SRM’s near term problem.
Financial statement analysis of SRM 2015 current, quick, and debt ratio, all of which fail to meet
the contractual limits 2.0, 1.0 and 55% respectively. Bank call immediate repayment of both long-
and short-term loan if they were not repaid within 10 days, could force the company bankruptcy.
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. SRM realized that this was not a
particularly wise decision for the long run, but he still did not think it would be necessary to follow

2
the policy for too long. SRM was optimistic that the orderly markets of the past would soon
reappear. SRM realized that he focused too much attention on marketing and production issues
without paying adequate heed to their financial implications. The company’s financial position can
be improved significantly over the next two years if the bank is willing to maintain and even
increase the credit lines. This view is bolstered by the fact that the company is in the middle of a
major reorientation of the production mix way from highly volatile farm sector and toward the
more stable medium-to-high growth markets. He had recently signed a contract for a plant
expansion that would require another $6,375,000of the capital during the first quarter of 2016. He
had planned to obtain this money by a short-term loan from MCNB to be repaid from the profit
generated in the first quarter of 2016. He believed that new facilities would enhance the production
capabilities in a very lucrative area of custom horse van.
Regarding 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.

Statement of Problem

Silver River Manufacturing Company facing the problems of decline in sales and losing market
share price. It leads the company in to the bankruptcy position. The financial position of the
company is deteriorating. The financial report of the company is representing deficit in 2015. The
company needs some more investment to overcome these problems occurs due to the losses in the
business. For the loan purpose, the MCNB requires quarterly financial statements from the SRM.
• To calculate SRM’s key financial ratios.
• How DuPont Analysis and Altman’s Z score presents financial health of Silver River
Manufacturing Company (SRM)?
• What are the challenging issues of Silver River Manufacturing Company (SRM) in
industry? What are its strengths and weaknesses?

3
Question 1(a):
Prepare a statement of changes in financial position for 2015 (sources and uses of funds
statement) or complete Table 6.

Silver River Manufacturing Company

Statement of Changes in Financial Position
For the Year Ended December 31st (thousands of dollar)
Particulars 2014 2015
Sources of funds
Net income after taxes 6987 831
Depreciation 1823 2244
Funds from operations 8810 3075
Long-term loan 3506 0
Net decrease in working capital - 471
Total sources 12316 3546

Application of funds
Mortgage change 295 287
Fixed assets change 2574 3051
Dividends on stock 1747 208
Net increase in working capital 7702 0
Total uses 12316 3546
Analysis of changes in working Capital
Increase (decrease) in current assets
Cash change (1260) (107)
AR change 1501 11985
INV change 15505 14992
CA change 15745 26870

Increase (decrease) in current liabilities

AP change 2104 14446
NP change 4116 10441
ACC change 1823 2454
CL change 8043 27341

Net increase (decrease) in working capital 7702 (471)

From the above calculated table, the sources of fund have been decreased due to the decrement in
net profit. There is no change in the long-term debt. As the uses of fund is more than the sources
of fund the working capital have been decreased.

4
Ques. 1(b) Calculate SRM’s key financial ratios for 2015 and compare them with those of
2013, 2014, industry average, and contract requirement or complete Table7
Table 7: Silver River Manufacturing Company
Ratio Analysis for year ended December 31st
Particulars 2013 2014 2015 Industry Remarks

Liquidity Ratios

Current Ratio 3.07 2.68 1.75 2.50 Good

Quick Ratio 1.66 1.08 0.73 1 Good
Leverage Ratio
Debt Ratios (%) 40.46 46.33 59.79 50.00 Good
Time interest earned 15.89 7.97 1.49 7.70 Poor
Asset management ratios

Inventory turnover(cost)a 7.14 4.55 3.57 5.70 Poor

Inventory turnover ratio(selling)b 9.03 5.59 4.19 7.00 Poor

Fixed asset turnover 11.58 11.95 12.09 12.00 Good

Total asset turnover 3.06 2.60 2.04 3.00 Poor
Average collection period 36.00 35.99 53.99 32 Poor
Profitability ratios

Profit margin (%) 5.50 3.44 0.39 2.90 Poor

Gross profit margin (%) 20.89 18.70 14.86 18.00 Poor
Return on total asset 16.83 8.95 0.79 8.80 Poor
Return on owner’s equity 28.26 16.68 1.96 17.50 Poor
Altman Z Factor 3.02 2.56 2.04 1.81/2.009 Gray Zone

5
 1. Liquidity Ratio:

Fig. 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

4
3
2
1
0
2013 2014 2015

SRM Company Industry Average

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 2015 as compared to 2013, 2014 and
industry average.ie. 1.75 < 3.07, 2.68 & 2.50.

Fig. 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

1.5

0.5

0
2013 2014 2015

SRM Company Industry Average

The quick ratios of SRM’s of 2013, 2014 are high, whereas for 2015 is less than both years.The
industry average is also more than that of quick ratio of SRM(i.e.73<1.66, 1.08 and 1.00), which
indicate the less liquidity position of this company

6
 2. Leverage ratios:
Fig. 2.1Debt ratio:

70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
2013 2014 2015

SRM Company Industry Average

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 59.796%. It is clear in the sense that the debt
ratios have been in increasing trend i.e. 40.46%, 46.33% and 59.796% in year 2013, 2014 and
2015 respectively which resembles the company’s more dependency towards leverage in
comparison with previous year.

Fig. 2.2 Time interest earned ratio:

18
16
14
12
10
8
6
4
2
0
2013 2014 2015

SRM Company Industry Average

The time interest earned ratio is declined from 2013 to 2015 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 2015 SRM has failed to maintain the ratio as off industry.

7
Fig. 3 Asset management ratio:

Inventory turnover ratio (cost):

0
2013 2014 2015

SRM Company Industry Average

Inventory turnover (selling):

10
8
6
4
2
0
2013 2014 2015

SRM Company Industry Average

Inventory turnover ratio has decreased from 7.14 to 3.57 times on cost and 9.03 to 5.59 times on
sales respectively in the year between 2013 and 2015, it shows the company is not efficient in
managing the inventory.

Fixed asset turnover ratio:

12.2
12
11.8
11.6
11.4
11.2
2013 2014 2015

SRM Company Industry Average

8
Effective utilization of fixed asset has been done by SRM, as the turnover generated from fixed
asset are in increasing trend i.e. from $11.58, to $12.097 in 2013 to 2015. The industry average is
$12 is less than that of Silver River Manufacturing it means the company has used its fixed assets
effectively.

Total asset turnover ratio:

0
2013 2014 2015

SRM Company Industry Average

In 2015, the total asset turnover is $ 2.06 which is less in contrast with 2013(ie.$ 3.06).this
indicate the company is not capable to utilize its total asset. As the industry average is $3, which
means SRM is not using its asset effectively to increase the productivity of the company with
respect to generate sales.

Average collection period:

60
50
40
30
20
10
0
2013 2014 2015

SRM Company Industry Average

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 36 days to collect its receivable in 2013 which increased to 53.99 in
2015. When compared to the industry average, SRM is less capable of collecting the receivables
as compared to industry average.

9
Profitability ratios:

Profit margin (%)

6
5
4
3
2
1
0
2013 2014 2015

SRM Company Industry Average

The profit margin ratio of SRM Company in 2013 is 5.5 and in 2015 is 0.386, 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.

Gross profit margin (%)

25
20
15
10
5
0
2013 2014 2015

SRM Company Industry Average

The gross profit margin is 20.89% in 2013 to 14.86% in 2015, 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.

10
Return on total asset:

20
15
10
5
0
2013 2014 2015

SRM Company Industry Average

The return on assets of SRM has been declining from 16.83% to 0.786% from 2013 to 2015.
Compared to industry average of 8.8% other companies are more efficient in generating profit
using its assets
SRM’s return on asset has drastically declined from 2013 to 2015 (ie.16.83% to 0.786%) as
compared to industry average i.e. 8.8%. ROA indicate the efficiency in generating profit using its
asset. Therefore, SRM is less effective in generating profit by using its asset, as compared to
compotators

Return on owner’s equity

30
25
20
15
10
5
0
2013 2014 2015

SRM Company Industry Average

Capabilities of generating profit from shareholders money determine the ROE. Return on equity
for SRM is rapidly declining from 2013 to2015, (i.e. 28.26 to 1.95%), industry average is found
to be 17.5%. which indicate SRM is less capable of generating profit from shareholder money
compared to competitors.

11
Question no. 2.
Based on the case data and the results of your analysis in Question 1, what are the SRM’s
strengths and weaknesses? What are the causes thereof? (Use of the Du Pont system and
Altman Z factor would facilitate analysis and strengthen your answer.)

Solution: Table 7
Silver River Manufacturing Company
Ratio Analysis Year Ended December 31

Particulars 2013 2014 2015 Industry Contractu

average al limits
Liquidity ratios
Current ratio 3.07 2.68 1.754 2.50 2.00
Quick ratio 1.66 1.08 0.73 1.00 1.00

Leverage ratios
Debt ratio (%) 40.46 46.33 59.79 50.00 55.00
Times interest earned 15.89 7.97 1.485 7.70

Asset management ratio

Inventory turnover (Cost) 7.14 4.55 3.57 5.70
Inventory turnover (sell) 9.03 5.59 4.195 7.00
Fixed asset turnover 11.58 11.95 12.097 12.00
Total asset turnover 3.06 2.60 2.0367 3.00
Average collection period 36.00 35.99 53.99 32.00

Profitability ratios
Profit margin (%) 5.50 3.44 0.386 2.90
Gross profit margin (%) 20.89 18.70 14.86 18.00
Return on total assets 16.83 8.95 0.786 8.80
Return on owners’ equity 28.26 16.68 1.955 17.50

Potential failure indicator

Altman Z factor 3.06 2.62 2.04 1.81/2.99

12
Particulars Net Profit Margin x Assets Turnover x Equity Multiplier Return on
(Net Income/Sales) (Sales/Total Assets) (Assets/Equity) = Equity
(ROE)

2013 (10355/ 188097) x (188097/61539) x (61539/36637) = 28.29%

= 0.0551 =3.0565 =1.6797
2014 (6987/203124) x (203124/78034) x (78034/41877) = 16.69%
=0.0344 =2.603 =1.8634
2015 (831/215305) x (215305/105711) x (105711/42500) = 1.9757%
=0.0039 =2.0367 =2.4873

Here,
X1= (CA-CL)/Total Assets
X2= Retained Earnings/Total Assets
X3= Earnings Before Interest and Taxes/Total Assets
X4=Market Value of Equity/Book Value of Total Debt
X5= Sales/Total Assets

For 2013,
X1= (45,298-14733)/61,539 = 49.67%
X2= 11041/61,539 = 17.94%
X3= 21251/61,539= 0.3453 times
X4= 68,481.57/24,901= 2.75 times
X5= 188,097/61,539= 3.06 times
Where,
Number of Shares= Net Income/Earning Per Share
= 10,355/2.69
= 3849.44 shares

13
Market Value of Equity= Number of Shares×Market Price Per Share
= 3849.44×17.79
= 68,481.57
Altman Z-factor:
= (0.012×0.4967) +(0.014×0.1794) +(0.033×0.3453) +(0.006×2.75) +(0.999×3.06)
=3.093

For 2014,
X1= (61,043-22,777)/78,034 = 49.04%
X2= 16,282/78,034 = 20.86%
X3= 15,364/78,034 = 0.1969 times
X4= 37,405.54/36,156= 1.02 times
X5= 203,124/78,034 = 2.60 times
Where,
Number of Shares= Net Income/Earning Per Share
= 6,987/1.81
= 3,860.22 shares
Market Value of Equity= Number of Shares×Market Price Per Share
= 3860.22×9.69
= 37,405.54
Altman Z-factor:
= (0.012×0.4904) +(0.014×0.2086) +(0.033×0.1969) +(0.006×1.02) +(0.999×2.60)
=2.62

14
For 2015,
X1= (87,913-50,118)/105,711 = 35.75%
X2= 16,904/105,711 = 15.99%
X3= 4,888/105,711 = 0.0462 times
X4= 3,852.82/63,211= 0.061 times
X5= 215,305/105,711 = 2.04 times
Where,
Number of Shares= Net Income/Earning Per Share
= 831/0.22
= 3,777.27 shares
Market Value of Equity= Number of Shares×Market Price Per Share
= 3,777.27×1.02
= 3,852.82
Altman Z-factor:
= (0.012×0.3575) +(0.014×0.1599) +(0.033×0.0462) +(0.006×0.061) +(0.999×2.04)
=2.04

Altman Z Factor:

Z Factor
4.00%
3.00%
2.00%
1.00%
0.00%
2013 2014 2015

Z Factor

15
Du Pont Analysis of SRM

For 2013

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

ROE = 10,355.00/188,097.00 * 188,097.00/61,539.00 * 61,539.00/36,637.00
ROE = 0.0550 * 3.0565 * 1.6796 = 0.2824 =28.24%
ROE = NPM * TAT * EM

For 2014

ROE = NI/Sales * Sales/Total Assets * Total Assets/Total Equit1

ROE =6,987.00/203,124.00* 203,124.00/78,034.00* 78,034.00/41,877.0
ROE = 0.0344 * 2.6030 * 1.8633 = 0.1668 = 16.68%
ROE = NPM * TAT * EM

For 2015

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

ROE = 830.00/215,305.00* 215,305.00/105,711.00 * 105,711 /42,500.00
ROE = 0.0038 * 2.0367 * 2.4873= 0.0195 = 1.95%
ROE = NPM * TAT * EM

Du Pont Analysis:

ROE
30.00%

20.00%

10.00%

0.00%
2013 2014 2015

ROE

16
Based on the case data and the results of ratio analysis SRM’s the strengths and weaknesses and
the causes thereof are listed below:

Strengths:
• The fixed asset turnover ratio 12.09 in 2015 is increasing. It indicates the number of times
the average fixed assets are turned over during the year of SRM. This shows that the fixed
assets are used effectively.

• SRM’s Altman Z score is compatible with the industry average (i.e. 2.04) against the
industry average of 1.81/2.99). Even though, the factor is compatible with the industry
average, it is not a good sign for the company. The company falls under gray zone and
needs to be more careful about going bankrupt.

Weakness:
• The profitability ratios (Profit Margin, Gross Profit Margin, Return on Total Assets &
Return on owner’s Equity) are in declining from 2013 to 2015. The net profit margin has
drastically reduced from 5.50 to 0.39 and is less than the industry average. Comparing with
the industry average of 2.90, the SRM’s operating efficiency is very poor considering the
competitors in the market.

• The Company is not in a relatively liquid position. The company has fewer current assets
than the current liabilities thereby showing negative net working capital. The current ratio
and quick ratio also reflect the less liquid position of SRM.

• The price earnings (PE) ratios are also declining from 6.61 in 2013 to 5.35 in 2014 and
finally 4.63 in 2015.

• Earnings per share (EPS) are declining from the year 2013: $2.69 to $1.81 in year 2014
and $0.22 in year 2015.

• Inventories and accounts receivable are increased steadily

17
 • Average collection period is higher in 2015, 54 days.

• Delay in payment of accounts payable.

• The firm’s equity multiplier is increasing from 1.68 times in 2013 to 1.86 times in 2014
and finally 2.49 times in 2015.

Table: 9
Silver River Manufacturing Company
Pro-forma Income Statement (Projected)
Particulars 2015 (Given) 2016 2017
(Projected) (Projected)
Net sales 215305 228223 249904
Cost of goods sold 183307 188284 199923
Gross profit 31998 39939 49981
Administrative and selling expenses 18569 18258 18743
Depreciation 2244 2665 2006
Miscellaneous expenses 6297 3994 3124
Total operating expenses 27110 24917 23872
Earnings before interest and tax (EBIT) 4888 15022 26108
Interest on short term loan 2006 4331 4331
Interest on long term loan 1052 1052 1052
Interest on mortgage 233 210 189
Net income before Tax 1597 9429 20536
Tax (@48%) 767 4526 9857
Net Income 831 4903 10679
Dividends on stock 208 0 0
Additions to retained earnings 623 4903 10679

18
Working note:

Particulars 2016 (Projected) 2017 (Projected)

Sales (215305*106%) (228223*109.5%)
= 228223 = 249904
Cost of goods sold (228223*82.5%) (249904*80%)
= 188284 = 199923
Administrative and selling (228223*8%) (249904*7.5%)
expenses = 18258 18743
Miscellaneous expenses (228223*17.5%) (249904*12.5%)
= 3994 = 3124

Table: 10
Silver River Manufacturing Company
Pro-Forma Balance Sheet (Projected)
Particulars 2015 2016 2017
(Given) (Projected) (Projected)
Assets
Cash 4296 39667(Bf) 49529(Bf)
Accounts receivable 32293 20286 22213
Inventory 51324 33032 35074
Current Assets 87913 92985 106816
Land, Building Plant and Equipment 25161 32173 33139
Accumulated Depreciation (7363) (10028) (10939)
Net fixed assets 17798 22145 22199
Total Assets 105711 115130 129015

Liabilities and Equities

Short term bank loan 20056 27068 27068
Accounts Payable 21998 17594 18474
Accruals 8064 10231 12789
Current Liabilities 50118 54894 58331
Long term bank loan 10519 10519 10519
Mortgage 2574 2314 2083
Long term bank loan 13092 12833 12602
Total liabilities 63211 67727 70933
Common stock 25596 25596 25596
Retained Earnings 16904 21807 32486
Owners’ Equity 42500 47403 58082
Total Capital 105711 115130 129015

19
Working note:
Calculation of account receivable.
Particulars 2016 2017

Average collection period at industry rate 32 32

Average Receivable = Average receivable = Average receivable

Sales Per Day 634 694

= 20286 = 22213
i.e. Receivables

Calculation of Inventory
Particulars 2016 2017
Inventory turnover ratio 5.7 5.7

COGS = 188284 = 199923

Inventory 5.7 5.7

Inventory = 33032 = 35074

Calculation of Retained Earnings

Particulars 2016 2017
Retained Earning Net income +Closing Net income +Closing
Retained earnings Retained earnings
= 4903+16904 = 10679+ 21807
= 21807 = 32486

Note:

1.Cash is the balancing figure.

2.Accounts receivables and inventory has been calculated by using the industry average ratios.
In 2016, the company has total cash balance of 39667 thousand and during the same year the short-
term bank loan to be retired is 27068
= (39667 – 27068)
= 12599
5% of sales is maintain by the company

20
Minimum cash balance = (228223 x 0.05)
= 11411.15
From the calculation we can see that the company is able to maintain the minimum cash balance.
Hence, it has enough cash balance to retire the short-term bank loans i.e. SRM will be able to
retire its short-term bank loan if the prediction made were materialized.
Question No.4.
Compute projected financial ratios for 2016 and 2017 (or complete Table 11). Compare these
ratios with 2015 along with industry averages and analyze improvement or deterioration in
financial condition.

Table 11: Silver River Manufacturing Company

Ratio Analysis Year Ended December 31, 2017 (Projected)

Particular 2015 2016 2017 Industry Remark

projected projected average
Liquidity ratio
Current ratio 1.75 1.69 1.83 2.50 Poor
Quick ratio 0.73 1.09 1.22 1.00 Poor
Leverage ratios
Debt ratio (%) 59.791 58.821 54.981 50.00 Poor
Times interest earned 1.48 2.68 4.68 7.70 Poor
Asset management ratios
Inventory turnover(cost) 3.57 5.7 5.7 5.70 Ok
Inventory turnover(selling) 4.19 6.9 7.12 7.00 Ok
Fixed asset turnover 12.09 10.3 11.3 12.00 Ok
Total asset turnover 2.04 1.98 1.94 3.00 Poor
Average collection period 54 32 32 32.00 Ok
Profitability ratios
Profit margin (%) 0.38% 2.15% 4.27% 2.90 Good
Gross profit margin (%) 14.86% 17.49% 20% 18.00 Good
Return on total assets 0.78% 4.26% 8.27% 8.80 Ok
Return on owners’ equity 1.95% 10.34% 18.38% 17.50 Ok

21
Working note:
A. Liquidity ratios
1.Current ratio = CA/CL
For 2015 For 2016 For 2017
= 87913/50118 = 92985/54894 = 106816/54894
= 1.75 = 1.69 = 1.831

2. Quick Ratio = CA – Inventory/ CL

For 2015 For 2016 For 2017
= 87913-51324/50118 = 92985-33032/54894 = 106816-35074/58331
= 0.73 = 1.09 = 1.22

B. Leverage ratios
1. Debt ratio % = Total Debt/ Total asset × 100
For 2015 For 2016 For 2017
= 63211/105711× 100% = 67727/115130×100% = 70933/129015× 100%
=59.79% = 58.82% = 54.98%

2. Time interest earned = EBIT/interest

For 2015 For 2016 For 2017
= 4888/3291 = 15022/5593 = 26108/5572
= 1.48 = 2.68 = 4.68

C. Assets management ratios

1. Inventory turnover (cost)a = COGS/inventory
For 2015 For 2016 For 2017
= 183307/51324 = 188284/33032 = 199923/35074
= 3.57 =5.7 = 5.7

22
2. Inventory turnover (selling)b = sales/inventory
For 2015 For 2016 For 2017
= 215305/51324 = 228223/33032 = 249904/35074
= 4.19 = 6.9 = 7.12

3. Fixed asset turnover = sales/ Net Fixed asset

For 2015 For 2016 For 2017
= 215305/17798 = 228223/22145 = 249904/21103
=12.09 =10.3 =11.8

4. Total asset turnover = Sales/Net total asset

For 2015 For 2016 For 2017
= 215305/105711 = 228223/115130 = 249904/129015
= 2.04 =1.98 = 1.94

5. Average collection period = Account receivable/ sales×360

For 2015 For 2016 For 2017
= 32293/215305×360 = 20286/228223×360 = 22213/249904×360
= 54 days = 32 days = 32 days

D. Profitability ratios
1. Profit margin (%) = Net income/Revenue
For 2015 For 2016 For 2017
= 831/215305 = 4903/228223 = 10679/249904
= 0.38% = 2.15% = 4.27%

23
2. Gross profit margin (%) = Gross profit/Net sale× 100%
For 2015 For 2016 For 2017
= 31998/215305 =39939/228223 = 49981/249904
= 14.86% = 17.49% = 20%

3. Return on total asset = Net income/ Total asset

For 2015 For 2016 For 2017
= 831/105711 = 4903/115130 = 106769/129015
= 0.78% =4.26% = 8.27%

4. Return on owners’ equity = Net income/ owners’ equity

For 2015 For 2016 For 2017
= 831/42500 = 4303/47403 = 10679/58082
= 1.95% = 10.34% = 18.38%

Liquidity Ratios:

Current ratio:
3
2.5
2
1.5
1
0.5
0
2015 2016 2017

SRM Company Industry Average

In 2016, the projected current ratio is lower than 2015 and Industry average. This shows that the
firm’s ability to meet its short-term obligations has decreased in 2016. In 2017, the projected
current ratio is quite higher than 2015 and lower than the industry average. This shows that the
firm’s ability to meet its short-term obligations has improved but is still poor in comparison to
industry average.

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Quick ratio:

1.5

0.5

0
2015 2016 2017

SRM Company Industry Average

In 2016, the projected quick ratio is higher than 2015 and industry average. This shows that the
ability of firm to meet its short-term obligations has improved. In 2017, the projected quick ratio
is quite higher than 2015 and industry average. This shows that the firm has improved its ability
to meet its short-term obligations.

Leverage Ratios:

Debt ratio:
65

60

55

50

45
2015 2016 2017

SRM Company Industry Average

In 2016, the projected debt ratio is lower than 2015 and quite higher than industry average. This
shows that company has decreased its assets which is financing from debts but it is quite higher in
comparison to industry average. In 2017, the projected debt ratio has decreased than 2015 and also
higher than industrial average. The debt ratio indicates that the company has minimized its risk
level.

25
Time interest earned ratio:
10

0
2015 2016 2017

SRM Company Industry Average

In 2016 the time interest earned ratio has increased than 2015 and is lower than the industry
average. This shows that the company is still unable to cover the interest expenses. In 2017, the
ratio is improved but still below the industrial average line which shows the improvement in ability
to cover the necessary interest expenses.

Asset Management Ratios:

Inventory turnover ratio(cost):

6
5
4
3
2
1
0
2015 2016 2017

SRM Company Industry Average

Inventory turnover ratio has been improved in the years 2016 and 2017 then in 2015 and is equal
to industrial average. From this we can conclude that the company’s inventory is producing sales
as that industry average.

26
Inventory turnover ratio (Sales):
8

0
2015 2016 2017

SRM Company Industry Average

In 2016, there has been increase in inventory turnover ratio (in costs) in comparison to 2015 and
is above the industry average. In 2017, this ratio is higher than 2015 but is below the industry
average showing deterioration in the company’s capacity in efficiently managing the inventory. If
we analyze the inventory turnover in terms of sales, we see in both the years 2016 and 2017 there
have been significant improvement in inventory turnover in comparison to the year 2015 and both
the years have inventory turnover equal to that of industry average. However, a better measure of
inventory turnover is the inventory turnover in terms of cost rather than in terms of sales.

Fixed assets turnover ratio:

13

12

11

10

9
2015 2016 2017

SRM Company Industry Average

The fixed assets turnover ratio in2016is low in comparison to that of the year 2015 and industry
average. However, there is some progress in utilization of fixed assets in the year 2017 but it is
still below in comparison to 2015 and industry average.

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Total assets turnover ratio:

0
2015 2016 2017

SRM Company Industry Average

The total assets turnover ratios in the year 2016 and 2017 are lower in comparison to the year 2015
and industry average. This ratio in the year 2015, 2016 and 2017 shows the decreasing trend. This
ratio is below the industry average line.

Average collection period (ACP):

60
50
40
30
20
10
0
2015 2016 2017

SRM Company Industry Average

In year 2016 and 2017 average collection period is equal to industry average. The firm is projected
to have sufficient improvement in Average collection period in comparison to 2015.

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Profitability Ratios:
Profit margin ratio:

0
2015 2016 2017

SRM Company Industry Average

In 2016, the projected profit margin has improved in comparison to the year 2015 but is still below
the industry average. However, in the year 2017 the projected profit margin has improved and is
higher than industry average. This shows that there will be improvement in financial condition of
the company in the year 2017.

Gross profit margin:

25
20
15
10
5
0
2015 2016 2017

SRM Company Industry Average

In year 2016 and 2017 the projected gross profit margin has increased in comparison to 2015. In
2016 it is below industry average but in 2017 it is above industry average showing the
improvement in financial condition.

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Return on Total Assets:

10
8
6
4
2
0
2015 2016 2017

SRM Company Industry Average

Return on assets is also been increased in the year 2016 and 2017 from 2015. In the year 2016 and
2017 SRM has failed to maintain the industry average but it has improved dramatically in the year
2017 and has able to maintain better return that of industry. Even With the increase in ROA which
is a good sign of progress.

Return on owner’s equity:

20

15

10

0
2015 2016 2017

SRM Company Industry Average

In 2016, there has been great improvement in ROE in comparison to the year 2015 but is still
below the industry average. But, in 2017 it is above the industry average showing the improvement
in both operating and financial decisions of the company.

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Q No.5.
If all short-term bank loans are repaid towards the end of the first half of 2016, do you think
that company is still able to pay regular dividends and maintain minimum cash balance?
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?

Solution:
When company repays all its short-term bank loan at the end of the first half of 2016, the interest
rate expenses for short term loan will be zero than company will be able to pay its regular dividend
on following years. For the projection of income statement and balance sheet we have certain given
information. Sales growth of 6% and 9.5% in 2016 and 2017 respectively, COGS 82.5 % and 80%
of sales in 2016 and 2017 respectively. Further, administrative and selling expenses 8% and 7.5%
of sales in 2016 and 2017 respectively. As well as miscellaneous expenses 1.75% and 1.25% of
sales in 2016 and 2017 respectively. Average collection period will be 32 days and inventory
turnover (cost) will be 5.7 and inventory turnover selling will be 7 as industry average. Tax rate is
40% and dividend is 25% as back dated calculation. There is no change in interest rates over two
year’s period and MCNB will charge 16% for the short-term loan.
If all the short-term loans are repaid at the end of first half of 2016, the company would be able to
pay its regular dividends in 2016 as well as in 2017. This is because the interest on short term loan
is being decreased in 2016 and is being zero by 2017.
The minimum cash balance required at the end of 2016 is 11411.165 (5% of 228223.3). The
company after paying the dividend of 25% during the year 2016 has the cash balance of
$10125440. So, the company will not be able to maintain the minimum cash balance of $10387276.
Since, after the payment of short-term loan all the ratios of the company are improving. We can
find that there is no any situation that indicates poor financial status.
The impacts on the ratios after the payment of short-term bank loans are:

31
Liquidity ratios
a. Current ratio: The improvement in the current ratios of the company shows better ability
of the company to meet its current obligations.
b. Quick ratio: The improvement in quick ratio of the company shows better ability to meet
its short-term obligations.

Leverage ratios
a. Debt ratio: The decrease in debt ratio of the company shows its less involvement of debt to
finance fixed assets of the company.
b. Time’s interest earned ratio: The improvement in the Time interest earned ratio shows is
ability to pay interest.

Asset management ratio

a. Total asset turnover: The increase in total asset turnover ratios shows the company has more
efficiently utilized the overall assets to generate more sales revenue.

Profitability ratios
a. Profit margin: The increase in the profit margin ratio shows the improvement in the
company’s ability to earn by its sale after paying all the necessary expenses.
b. Return on total assets: The improvement in return on total assets ratio shows the good
effectiveness of the operating management of the firm.
c. Return on owner’s equity: The increase in return on owners’ equity shows the improvement
in both operating and financial decisions of the company.

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 Table 12: Silver River Manufacturing Company
Pro Forma Income Statements (Revised)
Worksheet for Year End 2017 (Thousands of Dollars)
Particulars 2015 2016 Revised 2017 Revised
Net Sales 215305 228223 249904
Cost of Goods Sold 183307 188284 199923
Gross Profit 31998 39939 49981
Administrative and Selling 18569 18258 18743
Depreciation 2244 2665 2006
Miscellaneous expenses 6297 3994 3124
Total operating expenses 27110 24917 23873
EBIT 4888 15022 26108
Interest on short-term loans 2006 2165 -
Interest on long-term loans 1052 1052 1052
Interest on mortgage 233 210 189
Net income before tax 1597 11595 24867
Taxes 767 5566 11936
Net income 831 6029 12931
Dividends on stock 208 1507.25 3232.75
Additions to retained earnings 623 4521.75 9698.28

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 13: Silver River Manufacturing Company
Pro Forma Balance Sheets (Revised)
Worksheet for Year End 2017 (Thousands of Dollars)
Particulars 2015 2016 Revised 2017 Revised

Assets
Cash 4296 12217 22193
Accounts Receivable 32293 20286 22213
Inventory 51324 33032 35074

Current Assets 87913 65535 79480

Land, Buildings, Plant and Equipment 25161 32173 33139

Accumulated Depreciation (7363) (10028) (12033)

Net Fixed Assets 17798 22145 21105

Total Assets 105711 87680 100585

Liabilities and Equities

Short-term bank loans 20056 0.00 0.00
Account payable 21998 17594 18474
Accruals 8064 10231 12789

Current liabilities 50118 27826 31263

Long-term bank loans 10519 10519 10519

Mortgage 2574 2314 2083

Long-term debt 13092 12833 12602

Total liabilities 63211 40658 43865

Common stock 25596 25596 25596

Retained earnings 16904 21426 31124

Owners' equity 42500 47022 56720

Total Capital 105711 87680 100585

34
Working notes of Table 12

Calculations that affect changes

Particulars 2016 2017

Projected sales 215305 * 1.06 228223.3 228223.3* 1.095 249904.5

Cost of goods sold 82.5%of 28223.3 188284.2 80% 249904.5 199923.6

Administrative and
selling expenses 8% of 228223.3 18258.76 7.5% of 249904.5 18743

Miscellaneous expenses 1.75%of228223.3 3,993.9 1.25%of 249904.5 3123.81

Taxes 48% of 11595 5565.60 48% of 24867 11936.16

Working Notes on Table 13

Particulars
2016 2017
Retained Additions in Total Retained Additions in Total
earnings 2016 earnings 2017
(2015) (2016)
Retained 16904 4522 21426 21426 9698 31124
Earnings

Particulars 2016 2017

Formula Calculations Total Calculations Total
Accounts Average 32 20286 32= Receivables / 22213
Receivables collection (249904.5 / 360)
period = =Receivables
Receivables (228223.3 /
Sales per day 360)

35
 Inventory Inventory 5.7 = 33032 5.7= 199923 / Inventory 35074
turnover = 188284 /
Sales / Inventory
Inventory

Question No. 6:
On the basis of your analyses, do you think that the bank should:
a) Extend the existing short and long-term loans and grant the additional $7,012,500 loans,or
b) Extend the existing short and long-term loans without granting the additional loan, or
c) Demand immediate repayment of both existing loans?
If you favor (a) or (b) above, what conditions (collateral, guarantees, or other safeguards) should
the bank impose to protect itself on the loans?

Solution: Based on our analysis we think that the bank should in fact extend the existing short and
long-term loans and grant the additional $7,012,500 loan. We have following reasons to support
our recommendation:

1. The past performance of SRM has been observed to be quite impressive. For the past
years, SRM has depicted the characteristics of being a good client of the bank by
making due payments within the time line. It also has a good reputation in the market.
2. 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.
3. SRM is also committed to repay its loan. In fact, 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.

36
 4. There is a projected growth rate of 6% and 9.5% in sales on an average for 2016 and
2017 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.
5. The company is also likely to enter in the horse van and mobile chassis segments of the
market that are rapidly growing with significant profit prospective. Such an investment
is likely to reduce the dependency of the company on farm and light utility trailer
segment that is presently causing the firm’s poor performance.
6. Assuming that the projected ratios hold true in future, these ratios exceed the
contractual requirement of the bank. Hence, it is very likely that SRM will eventually
succeed in fulfilling its financial obligations.
7. SRM’s projected Altman Z factor is increasing and is above 3 for the years 2016 and
2017 which shows the less chances of company going bankrupt in future.

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

Question No.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?

Solution: If the bank decides to withdraw the entire line of credit and to demand immediate
repayment of two existing loans, alternatives that would be open to SRM are:
• Additional issues of common stock:
The Silver River Manufacturing Company (SRM) can issue the additional number of
shares of common stock to collect the capital fund and to manage the current problem.
• Delay payment made in account payable:
The SRM can delay on payment of account payable. It controls the company’s cash
outflow.
• Sales of assets:
The company can sell the ideal fixed assets to generate fund to repay the existing loan.

37
 • Pay cut off to dividends:
The company can cut off cash dividend for a certain period of time to manage the cash
balance.
• Timely collection of accounts receivables:
The company has to make its collection policy stricter so that the creditor will pay in time,
or SRM can sell its account receivable.

Question No.8:
Explain some of the lessons learnt from the case.

Solution: Silver River Manufacturing company (SRM), a large regional producer of agricultural
utility such as grove trailers, citrus transport carrier, is being hit hard by deteriorating nation’s farm
economy. 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 a alerting phone call to the Greg White, founder and president of
SRM.
Due to ensuing loss of public trust the regulators of MCNB are becoming strict in their examination
of bank loan portfolios and lending practice, because of which SRM might have to suffer.

Greg White, an optimistic person, after attending seminar on executive development convinced
that the key to sustained profit and superior performance was sales growth and the achievement of
higher share of the market so; he started producing all his products relentlessly and relaxed the
credit term to capture more market share. Until the third quarter of 2015 indeed, the sales were
high but during fourth quarter inventories as well as receivable started rocketing.

Over optimist White had always taken it for granted that MCNB would increase his line of credit
and when he was about to turn to MCNB to finance increase of assets, MCNB was considering
reducing or even eliminating such loan. Knowing this ground reality, White realized, for the sales
growth and sustainable profit is possible only when reasonable profit margins at every sale are
made which was the crux point. Failing this point to notice early was the main cause of his

38
company to be in such deteriorating condition.

White, knew he had focused much on marketing and production issues without paying adequate
attention to their financial implications and started to switch his production form volatile farm
sector to more stable medium-to-high growth markets of Horse Vans, Mobile home chassis etc.
Likewise, SRM will change its policy of aggressive marketing and sales promotion and return to
full-margin pricing, standard industry credit terms and tighter credit standards; remaining within
the periphery of industry average.

What learning we can gain from the case of SRM is that as being manager one shouldn’t apply
any policies without analyzing the effect of decision on company’s financial position. One should
always consider the future environment to make sure that the decision made by manager is going
to rock in future. Major things learned from this case study can be summarized below:

• How to look at the strength and weakness of a company.

• How to analyze the company’s financial condition based on different kinds of ratios.
• How to look at the different corner of the financial statements.

39