Amnd 4 Silver River Manufacturing Company Report

FINANCIAL ANALYSIS OF

SILVER RIVER MANUFACTURING COMPANY

CASE STUDY REPORT SUBMITTED BY

SANJAY PUDASAINI

SANJAY K. YADAV

SHEKHAR SHARMA

SHRAWAN TAMRAKAR

SIDDHANT THAKURI

SUBHASH C. RAI

SUDEEP KHANAL

SUBMITTED TO

DR. RADHE SHYAM PRADHAN

FACULTY OF MANAGEMENT

KATHMANDU UNIVERSITY SCHOOL OF MANAGEMENT

02 JULY 2011

1 | Financial Analysis of Silver River Manufacturing Company

Current AssetCurrent Liabilities

Current Asset – Inventory Current Liabilities

X 100 %Total Debt Total Asset

EBITInterest Expenses

Cost of Goods SoldAverage Inventory

Net Sales Inventory

Net SalesNet Fixed Assets

Net SalesTotal Assets

Receivable Net Sales per Day

Net Income Net Sales X 100 %

Gross Profit Net Sales X 100 %

Net Income Common Equity X 100 %

FINANCIAL RATIOS USED IN THE CASE

1) Current Ratio :

2) Quick Ratio:

3) Debt Ratio:

4) Times interest Earned:

5) Inventory Turnover Ratio(Cost):

6) Inventory Turnover Ratio(Selling):

7) Fixed Asset Turnover:

8) Total Asset Turnover:

9) Average Collection Period:

10) Profit Margin:

11) Gross Profit Margin:

12) Return on Owner's Equity:


13) Price Earnings Ratio:Market Price Per share (MPS)

Earnings Per Share(EPS)

14) Earnings Per Share: Net Income

No .of Common SharesOutstanding

15) Market Price Per Share (MPS) PE ratio X EPS

16) Dividend Pay Out RatioDividend Per Share(DPS )Earnings Per Share (EPS)

17) Altman Z score, Z = 0.012X1 + 0.014X2 + 0.033X3 + 0.006X4 + 0.999X5

Where, X1 = Current Assets−Current Liabilities

Total Assetsx 100

X2 = Retained Earnings

Total Assets x 100

X3 = Earnings Before Interest∧Tax(EBIT )

Total Assets

X4 = Market Value of Equity

Book Value of Total Debt

X5 = Net Sales

T otal Assets

18) Du-Pont identity

Returns on Equity = Total Assets Turnover X Net Profit Margin x Equity Multiplier

= Net Sales

Total Assetsx

Net IncomeNet Sales

xTotal Assets

Owners E quity

BACKGROUND OF SILVER RIVER MANUFACTURING COMPANY (SRM)


Silver River manufacturing company (SRM) is a large listed regional producer headed by Mr. Greg White that designs and produces farm and utility trailers, specialized livestock carriers, and mobile home chassis. The existing major markets are the farmers and boat companies.

More than 85% of SRM’s sales come from the southeastern part of the US, although a growing market for custom horse transport vans designed and produced by SRM is developing nationally and even internationally. Likewise, several major boat companies in Florida work closely with SRM in designing trailers for their new offerings, and these boat-trailer “packages” are sold through the nationwide dealer networks of the boat companies. With few exceptions, the products manufactured by SRM are not subject to technological obsolescence or to deterioration, and in those instances where technology is a factor to be considered, SRM holds several patents with which it can partially offset some of the risks.

Marion County National Bank (MCNB) is the official banker of SRM that has sanctioned short and long term credit facilities. MCNB considered SRM to be a financially sound and efficiently managed firm until the symptoms of illness of SRM surfaced. Being a close friend and a well wisher, Ms. Lesa Nix, Vice President of MCNB, informs Mr. White that the financial health of SRM worsened from 2004 through 2005 such that MCNB might consider calling back the credit facilities while SRM has made a commitment to expand its facility requiring an additional fund of $6.375 million . Mr. White had planned to obtain this additional money by a short term loan from MCNB.

The Environment of SRM

SRM’s 45 to 50 % sales depend on farmers and recession has affected the nation’s farm economy at least since the start of the 2000s causing severe decline in the demand for farm equipments. Moreover freezes for two straight winters have affected Florida’s citrus and vegetable industries resulting into drastic curtailment in demand for new grove trailers and citrus transport carriers . Although considered temporary, these adverse conditions affected the performance of companies like SRM such that they were on the verge of bankruptcy. The public confidence eroded coming to the year 2005 that was reflected in sharp decline in Market price of the stock of SRM.

The Financial Performance of SRM: Strengths and Weaknesses

SRM’s products are not subject to technological obsolescence or to deterioration and in those instances where technology is a factor to be considered, SRM holds several patents with which it can partially offset some o f the risks. SRM is led by Mr. White who is considered as a pillar of the community and has been able to maintain excellent rapport with his suppliers and lenders. The demand for the products of SRM despite hit in the short run is in fact profitable in the long run. The plant and machinery and the size of the firm are strengths based on which SRM has been able to become a large producer and supplier of farm related equipments. Before 2004, SRM was sound


Internal Audit, 07/02/11,

Weaknesses, causes,Dupont and altman to support

in all respects of business which is evident from the following statement of changes in financial positions and analysis of key financial ratios.

Table6. Silver River Manufacturing CompanyStatement of Changes in Financial Position Year Ended December 31

(USD in'000)Particulars 2004 2005

Sources of funds Net income after taxes 6,351.70 755.02 Depreciation 1,657.50 2,040.00

Funds from operations 8,009.20 2,795.02 Long-term loan 3,187.50 - Net decrease in working capital 428.25

Total sources 11,196.70 3,223.27 Application of funds Mortgage change 267.75 261.38 Fixed assets change 2,339.62 2,773.13 Dividends on stock 1,587.93 188.76 Net increase in working capital 7,001.40

Total uses 11,196.70 3,223.27 Analysis of changes in working capital Increase (decrease) in current assets Cash change (1,145.83) (96.71)AR change 1,364.25 10,894.86 INV change 14,095.12 13,629.75

CA change 14,313.54 24,427.90 Increase (decrease) in current liabilities AP change 3,742.13 9,492.38 NP change 1,912.50 13,132.50 ACC change 1,657.50 2,231.28

CL change 7,312.13 24,856.16 Net increase (decrease) in working capital 7,001.41 (428.26)

Table 7. Silver River Manufacturing Company

Ratio Analysis Year Ended December 31

Particulars 2003 2004 2005Industry Average

Contractual Limits

Remarks2005

Liquidity ratios

Current ratio 3.07 2.68 1.75 2.502.00 Poor


Quick ratio 1.66 1.08 0.73 1.001.00 Poor

Leverage ratios

Debt ratio (%) 40.46 46.33 59.80 50.0055.00 Poor

Times interest earned 15.89 7.97 1.49 7.70Poor

Assets management ratios

Inventory turnover (Cost) 7.14 4.55 3.57 5.70Poor

Inventory turnover (Selling) 9.03 5.59 4.19 7.00

Poor

Fixed asset turnover 11.58 11.95 12.10 12.00Ok

Total asset turnover 3.06 2.60 2.04 3.00Poor

Average collection period 36.00 35.99 53.99 32.00Poor

Profitability ratios

Profit margin (%) 5.50 3.44 0.39 2.90Very poor

Gross profit margin (%) 20.89 18.70 14.86 18.00Poor

Return on total assets 16.83 8.95 0.79 8.80Very poor

Return on owners' equity 28.26 16.68 1.95 17.50Very poor

Potential failure indicator

Altman Z factor 6.71 4.75 2.89 1.81/2.99Altman Z score, Z = 0.012X1 + 0.014X2 + 0.033X3 + 0.006X4 + 0.999X5

Where, X1 = Current Assets−Current Liabilities

Total Assetsx 100


X2 = Retained Earnings

Total Assets x 100

X3 = Earnings Before Interest∧Tax(EBIT )

T otal Assets

X4 = Market Value of Equity

Book Value of Total Debt

X5 = Net Sales

Total Assets

2003 2004 2005

1.EBIT 19,318.7

3 13,967.64 4,443.37

2. Total Assets 55,944.3

1 70,939.97 96,101.00

3. Net Sales 170,997.5

0 184,658.25 195,731.63 4.Total Market Value of shares (in $ 000)=

Total earnings *P/E Ratio 62,128.3

1 33,664.01 3,473.09

5. Total Liabilities 22,637.6

3 32,869.51 57,464.29

6. Current Assets 41,179.8

1 55,493.35 79,921.25

7. Current Liabilities 13,393.8

8 20,706.01 45,562.17

8. Retained Earnings 10,037.6

8 14,801.45 15,367.72

Till 2004, SRM was able to maintain a high liquidity ratio in the form of current ratio and quick ratio of 2.68 and 1.08 that were above industry averages of 2.50 and 1.0 respectively and also above the contractual limit. Also, SRM was able to charge good prices for its products that contributed to its profit lines. The gross profit margin and net profit margin were above the industry averages. The Altman Z score was one of the strengths of SRM prior to 2005. Score of 6.71 and 4.75 for 2003 and 2004 respectively are above the bankruptcy prediction score of 2.99 indicating a sound financial position and least possibilities of bankruptcy at least up to two years down the line.

Du-Pont Identity


Returns on Equity = Total Assets Turnover X Net Profit Margin x Equity Multiplier

= Net Sales

Total Assetsx

Net IncomeNet Sales

xTotal Assets

Owners Equity

Du pont Identity 2003 2004 2005 Ind. AverageNet Profit Margin 5.50 3.44 0.39 2.90 Total Assets Turnover 3.06 2.60 2.04 3.00 Equity Multiplier 1.68 1.86 2.49 2.00 Return on Equity 28.27 16.64 1.98 17.50

Before 2004, when the operations of SRM were controlled and demand of their products were growing, SRM had maintained Total Assets Turnover, Equity multiplier and Net Profit Margin in better form compared to the industry averages. In fact, his debt ratio was less than the industry average allowing more room for procurement of debt.

After 2004, however, the scenario changed drastically. Notwithstanding the adversities in demand for farm equipments, SRM increased its investment in production of the products and used aggressive marketing techniques to enhance sales and acquire more market share with a misconception that sales and market share would curb their financial problems. It lowered its sales prices and applied liberal credit terms in its false quest to increase sales and market share.

However, the growth of 8% (2004) and 6% (2005) in sales resulted in increment in Costs of Goods sold and decline in profits. As these growth rates were far lower than expected, SRM ended with piling inventories. In addition, the lax credit terms resulted in huge receivables with an average collection period of 54 days, a huge negative deviation of 22 days compared to the industry average. It was obvious, SRM started lagging behind timely repayments to its suppliers. The inventories grew by 74% (2004) and additional 41% in 2005. The receivable was bound to follow the league to an all time growth of 59% in 2005. As expected, the borrowings from MCNB fell too short to manage the working capital. By 2005 December, the payables had risen by 6 percentage points to 20% of the total assets.

Table 1: Silver River Manufacturing CompanyBalance Sheet Year Ended December 31

(USD in'000)Particulars 2003 2004 2005

Assets Cash 5,148.31 4,002.48 3,905.77 Accounts receivable 17,097.75 18,462.00 29,356.86 Inventory 18,933.75 33,028.87 46,658.62

Current assets 41,179.81 55,493.35 79,921.25 Land, buildings, plant and equipment 17,760.75 20,100.37 22,873.50


Accumulated depreciation (2,996.25) (4,653.75) (6,693.75)Net fixed assets 14,764.50 15,446.62 16,179.75 Total assets 55,944.31 70,939.97 96,101.00 Liabilities and equities Short-term bank loans 3,187.50 5,100.00 18,232.50 Accounts payable 6,763.88 10,506.01 19,998.39 Accruals 3,442.50 5,100.00 7,331.28

Current liabilities 13,393.88 20,706.01 45,562.17 Long-term bank loans 6,375.00 9,562.50 9,562.50 Mortgage 2,868.75 2,601.00 2,339.62 Long-term debt 9,243.75 12,163.50 11,902.12

Total liabilities 22,637.63 32,869.51 57,464.29 Common stock 23,269.00 23,269.00 23,269.00 Retained earnings 10,037.68 14,801.45 15,367.72 Owners' equity 33,306.68 38,070.45 38,636.72 Total liabilities and equities 55,944.31 70,939.96 96,101.01

SRM increased its borrowing both short and long term to meet its deficit in working capital but with growing receivables and payables, it simply could not. The total debt had jumped to a record 60% of total assets in 2005 that was a growth of 20 percentage points as compared to the total debt of 2003.

Furthermore as a result of reduction in prices for aggressive marketing, the cost of goods sold elevated from an average of 79% (2003) to 85% of sales by 2005. Its expenses being a variable of sales kept on mounting ultimately steeply depressing the net profit margin to a mere 0.39% in 2005 from 5.5% of 2003.

Table 2: Silver River Manufacturing CompanyIncome Statement as at December 31

(USD in'000)Particulars 2003 2004 2005

Net sales 170,997.50 184,658.25 195,731.63 Cost of goods sold 135,267.74 150,131.22 166,642.58

Gross profit 35,729.76 34,527.03 29,089.05 Administrative and selling 12,789.79 15,344.64 16,880.96 Depreciation 1,593.75 1,657.50 2,040.00 Miscellaneous expenses 2,027.49 3,557.25 5,724.72

Total operating expenses 16,411.03 20,559.39 24,645.68 EBIT 19,318.73 13,967.64 4,443.37 Interest on short-term loans 318.75 561.00 1,823.25 Interest on long-term loans 637.50 956.25 956.25 Interest on mortgage 259.83 235.58 211.90

Net income before tax 18,102.65 12,214.81 1,451.97


Taxes 8,689.27 5,863.11 696.95 Net income 9,413.38 6,351.70 755.02

Dividends on stock 2,353.35 1,587.93 188.76 Additions to retained earnings 7,060.03 4,763.77 566.26

In effect, market lost its confidence on the stock of SRM due to the deteriorating Earnings Per share to $0.22 (2005) from $2.69 (2003) and crashed the stock price to $1.02 in 2005 that was to the tune of $17.79 in 2003.

Financial ratio table shows the financial ratios of SRM for 2003, 2004 and 2005. It can be observed that every performance indicator of the SRM's business was worsening through the years and in comparison to the industry averages as well. The liquidity, profitability, leverage, returns and the market indicators all gave way. Of them, the heightened business activities of SRM severely hampered the liquidity and returns. The deteriorating Altman z scores 6.71 (2003), 4.75 (2004), 2.89 (2005) further indicated an increasing probability of failure if corrective actions were not taken immediately that would reverse the so considered short term problem of SRM.

With birds eye view of the business through the Du-pont identity it can be observed that the Asset management failed resulting in huge inventories and receivables, the reduction in prices resulted in deteriorating profit margin and to make over, SRM was deep down in debt more than it actually could manage.

The following realization of Mr. White properly summarizes the cause of the problem:

“ If you cut prices to where you are losing money on every sale, you won’t make it up with volume. The strategy of high sales growth and market share can work only when it is possible to preserve reasonable profit margins at the same time. Failure to do just that is what got us in trouble.”

Case problem

We have been charged with the task to project the financial performance of SRM by Mr. White for year 2006 and 2007 and analyze the prospects and issues in these years that will be relevant for further business decisions to Mr. White and to negotiate with MCNB for extension and new credit facilities. We also need to evaluate whether to extend new short term credit facility of $6.375 million to SRM assuming the expectations of SRM for 2006 and 2007 materialize. The tasks can be outlined as following:

1. Analyze SRM’s ability to retire its loans in 2006 and/or 2007.

2. Analyze SRM’s ability to pay dividends as well as maintain minimum cash balance.


3. Analyze from the bank’s perspective regarding extension of existing loans and possibilities of extending of loans.

4. Analyze the alternatives for SRM should the bank withdraw the credit facilities

For this purpose, we have been provided with sales growth projections, expected growth in expenses. Further, we have been asked to prepare the projections based on following assumptions:

1. Mr. White's forecasts (in the table below) shall materialize2. MCNB shall disburse additional short term loan of $6,375,000.00 to SRM3. SRM shall be able to repay the loan by the sales from new plant by June end 20064. The company does not pay out dividends in the projected years.5. Cash is the balancing figure in the calculations in the projected balance sheets for 2006

and 2007.

Expectations 2006 2007 RemarksWeighted Avg. Sales Growth 6% 9.50% of previous year salesCost of Goods Sold 82.50% 80% of salesAdministrative Expenses 8% 7.50% of salesMiscellaneous Expenses 1.75% 1.25% of salesAverage Collection Period 32 days 32 days par with industry averageInventory Turnover (cost) 5.7 times 5.7 times par with industry averagePE Ratio 5.5 6.5 Interest rate 16% 16% Federal and State Tax 48% 48%

The Financial Projections

Based on the assumptions and actual data provided in the case for 2005, the following projected financial statements are prepared.

Table 9: Silver River Manufacturing Company

Pro Forma Income Statement (Projected)

Worksheet for Year End 2007

(USD in'000)

Particulars 20052006

Projected 2007

ProjectedNet sales 195,731.63 207,475.53 227,185.71


Cost of goods sold 166,642.58 171,167.31 181,748.57 Gross profit 29,089.05 36,308.22 45,437.14

Administrative and selling 16,880.96 16,598.04 17,038.93 Depreciation 2,040.00 2,422.50 1,823.00 Miscellaneous expenses 5,724.72 3,630.82 2,839.82

Total operating expenses 24,645.68 22,651.36 21,701.75 EBIT 4,443.37 13,656.86 23,735.39 Interest on short-term loans 1,823.25 3,937.20 3,937.20 Interest on long-term loans 956.25 956.25 956.25 Interest on mortgage 211.90 190.54 171.52

Net income before tax 1,451.97 8,572.87 18,670.42 Taxes 696.95 4,114.98 8,961.80

Net income 755.02 4,457.89 9,708.62 Dividends on stock 188.76 - -

Additions to retained earnings 566.26 4,457.89 9,708.62

Table 10: Silver River Manufacturing CompanyPro Forma Balance Sheets (Projected)

Worksheet for Year End 2007(USD in'000)


Projected 2007

ProjectedAssets

Cash 3,905.77

36,060.50 46,021.25

Accounts receivable 29,356.86

18,442.27 20,194.29

Inventory 46,658.62

30,029.35 31,885.71

Current assets 79,921.25

84,532.12 98,101.25

Land, buildings, plant and equipment 22,873.50

29,248.50 30,125.96

Accumulated depreciation (6,693.75)

(9,116.25) (10,939.20)

Net fixed assets 16,179.75

20,132.25 19,186.76

Total assets 96,101.00

104,664.37 117,288.01

Liabilities and equities

Short-term bank loans 18,232.50

24,607.50 24,607.50

Accounts payable 19,998.39

15,994.88 16,794.62


Accruals 7,331.28

9,301.13 11,626.41

Current liabilities 45,562.17

49,903.51 53,028.53

Long-term bank loans 9,562.50

9,562.50 9,562.50

Mortgage 2,339.62

2,103.75 1,893.75

Long-term debt 11,902.12

11,666.25 11,456.25

Total liabilities 57,464.29

61,569.76 64,484.78

Common stock 23,269.00

23,269.00 23,269.00

Retained earnings 15,367.72

19,825.61 29,534.23

Owners' equity 38,636.72

43,094.61 52,803.23

Total liabilities and equities 96,101.01

104,664.37 117,288.01

Similarly, with the help of ratio derivation formula in page 2 and 3, the financial ratios for year 2006 and 2007 are derived as follows:

Table 11: Silver River Manufacturing Company

Ratio Analysis Year Ended December 31, 2007 (Projected)


Projected 2007

Projected

Industry

Average

Contractual limits

Remarks

Liquidity ratios

Current ratio 1.75 1.69 1.85

2.50

2.0

Improvement

Quick ratio 0.73 1.09 1.25

1.00

1.00

Above and average

Leverage ratios

Debt ratio (%)

59.80 58.83 54.98

50.00

55 Improvement

Times interest earned 2.69 4.69 Improvement


1.49 7.70 Assets management ratios

Inventory turnover (Cost) 3.57 5.70 5.70

5.70

Good Improvement

Inventory turnover (Selling)

4.19 6.91 7.13

7.00

Improvement

Fixed asset turnover

12.10 10.31 11.84

12.00

Poor but improving

Total asset turnover 2.04 1.98 1.94

3.00

Poor

Average collection period

53.99 32.00 32.00

32.00

Good Improvement


Profit margin (%) 0.39 2.15 4.27

2.90

Good Improvement

Gross profit margin (%)

14.86 17.50 20.00

18.00

Good Improvement

Return on total assets 0.79 4.26 8.28

8.80

Improvement

Return on owners' equity 1.95 10.34 18.39

17.50

Good Improvement


2003 2004 2005 2006 Projected

2007 Projected

2006 Revised

2007 Revised

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

Quick ratioCurrent ratio

Liquidity Ratios


2003 2004 2005 2006Projected

2007Projected

2006Revised

2007Revised

0

10

20

30

40

50

60

70

Times interest earnedDebt ratio (%)

Leverage Ratios


2003 2004 2005 2006Projected

2007Projected

2006Revised

2007Revised

0

10

20

30

40

50

60

70

80

Average collection periodTotal asset turnoverFixed asset turnoverInventory turnover (Selling)Inventory turnover (Cost)

Asset Management Ratios

2003 2004 2005 2006Projected

2007Projected

2006Revised

2007Revised

0

10

20

30

40

50

60

70

80

Return on owners' equityReturn on total assetsGross profit margin (%)Profit margin (%)



2003 2004 2005 2006Projected

2007Projected

2006Revised

2007Revised

-

50.00

100.00

150.00

200.00

250.00

Altman Z factorReturn on owners' equityReturn on total assetsGross profit margin (%)Profit margin (%)Average collection periodTotal asset turnoverFixed asset turnoverInventory turnover (Selling)Inventory turnover (Cost)Times interest earnedDebt ratio (%)Quick ratioCurrent ratio

Based on Mr. White’s expectation of repaying all short term loans by mid 2006, the performance of SRM reflected in the following revised financial statements and key ratios table:

Table 12: Silver River Manufacturing CompanyPro Forma Income Statement (Revised)

Worksheet for Year End 2007 (USD in'000)



Revised2007

Revised

Net sales 195,731.63

207,475.53

227,185.71

Cost of goods sold 166,642.58

171,167.31

181,748.57

Gross profit 29,089.05

36,308.22

45,437.14

Administrative and selling 16,880.96

16,598.04

17,038.93

Depreciation 2,040.00

2,422.50

1,823.00

Miscellaneous expenses 5,724.72

3,630.82

2,839.82

Total operating expenses 24,645.68

22,651.36

21,701.75

EBIT 4,443.37

13,656.86

23,735.39

Interest on short-term loans 1,823.25

1,968.20

-

Interest on long-term loans 956.25

956.25

956.25

Interest on mortgage 211.90

190.54

171.52

Net income before tax 1,451.97

10,541.87

22,607.62

Taxes 696.95

5,060.10

10,851.66

Net income 755.02

5,481.77

11,755.96

Dividends on stock 188.76

1,370.44

2,938.99

Additions to retained earnings

566.26

4,111.33

8,816.97

Table 13:Silver River Manufacturing CompanyPro Forma Balance Sheets (Revised)

Worksheet for Year End 2007 (USD in'000)


Revised2007

Revised


Assets

Cash 3,905.77

11,106.44

20,175.54

Accounts receivable 29,356.86

18,442.27

20,194.29

Inventory 46,658.62

30,029.35

31,885.71

Current assets 79,921.25

59,578.06

72,255.54

Land, buildings, plant and equipment

22,873.50

29,248.50

30,125.96

Accumulated depreciation (6,693.75)

(9,116.25)

(10,939.20)

Net fixed assets 16,179.75

20,132.25

19,186.76

Total assets 96,101.00

79,710.31

91,442.30

Liabilities and equities

Short-term bank loans 18,232.50

-

-

Accounts payable 19,998.39

15,994.88

16,794.62

Accruals 7,331.28

9,301.13

11,626.41

Current liabilities 45,562.17

25,296.01

28,421.03

Long-term bank loans 9,562.50

9,562.50

9,562.50

Mortgage 2,339.62

2,103.75

1,893.75

Long-term debt 11,902.12

11,666.25

11,456.25

Total liabilities 57,464.29

36,962.26

39,877.28

Common stock 23,269.00

23,269.00

23,269.00

Retained earnings 15,367.72

19,479.05

28,296.02

Owners' equity 38,636.72

42,748.05

51,565.02

Total liabilities and equities 96,101.01

79,710.31

91,442.30

Table 14:Silver River Manufacturing Company


Ratio Analysis Year Ended December 31, 2007 (Revised)


Revised2007

Revised Industry AverageLiquidity ratios

Current ratio 1.75

2.36

2.54

2.50

Quick ratio 0.73

1.17

1.42

1.00

Leverage ratios

Debt ratio (%) 59.80

46.37

43.61

50.00

Times interest earned 1.49

4.38

21.05

7.70

Assets management ratios

Inventory turnover (Cost) 3.57

5.70

5.70

5.70

Inventory turnover (Selling)

4.19

6.91

7.13

7.00

Fixed asset turnover 12.10

10.31

11.84

12.00

Total asset turnover 2.04

2.60

2.48

3.00

Average collection period 53.99

32.00

32.00

32.00


Profit margin (%) 0.39

2.64

5.17

2.90

Gross profit margin (%) 14.86

17.50

20.00

18.00

Return on total assets 0.79

6.88

12.86

8.80

Return on owners' equity 1.95

12.82

22.80

17.50

From the Table 9 and 10 given above, it is clear that if the bank were to maintain the present credit lines and grant an additional $6.375 million short term loan effective from Jan 01, 2006, the company would be able to retire all $ 24,607,500 existing on Dec 31, 2006 because cash balance as on Dec 31, 2006 is $ 36,060,500 and even after retiring the $ 24,607,500 loan , the


remaining cash balance $ 11,453,000 will be more than the requirement of cash balance @ 5 % of sales (i.e. $ 10,373,780).

From the Tables 12, 13 and 14 given above, it is clear that if the bank were to maintain the present credit lines and grant an additional $6.375 million short term loan effective from Jan 01, 2006, the company would be able repay all existing short term bank loans by June 2006 and at the same time pay regular dividend of 25 % and maintain minimum cash requirement of 5 % of sales. From Table 14, it is clear that almost all ratios improve with this policy and hence, this policy is good.

From the Perspective of MCNB

MCNB should extend the existing short and long term loans and grant the additional $ 6.375 million to SRM. SRM bears good prospect of turnaround in 2006 and 2007 but only if can expand its operation with new plant


Amnd 4 Silver River Manufacturing Company Report

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