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    Ace Institute of Management EMBA Fall 2011

    Assignment- 1

    Financial Analysis of Sliver River Manufacturing Company

    BY

    SABIN MAHARJAN

    SACHIN SHRESTHA

    RAJESH PANDEY

    RAJIB PATHAK

    RUPESH KUMAR SHAH

    SUBMITTED IN PARTIAL FULFILLMENT OF THE

    REQUIREMENTS OF EXECUTIVE MASTER OF BUSINESS

    ADMINISTRATION FOR COURSE CORPORATE FINANCIAL

    DECISION IN ACE INSTITUTE OF MANAGEMENT

    To

    Prof. Radhe Shyam Pradhan (Phd.)

    COURSE INSTRUCTOR Corporate Financial Decision

    Date - 27th July 2012

    1| Financial Analysis of Silver River Manufacturing Company

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    TABLE OF CONTENT Pages

    1. General Background

    2. Issues 1a: Sources and uses

    3. Issues 1b: Computation of ratios and analysis

    4. Issues 2: Analysis of Strength & Weakness

    5. Du Pont Analysis

    6. Altmans Z Factor

    7. Issues 3: Projection of Financial Statement 2006 & 2007

    8. Issue 4: Projection of Financial ratios 2006 & 2007 & analysis

    9. Issue 5: Revision of Financial Statement & ratios & analysis

    10. Issue 6: MNCB Prospective

    11. Issue 7: Alternatives

    12. Conclusion

    2| Financial Analysis of Silver River Manufacturing Company

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    General Background

    This is a typical case focusing on the financial position of the Silver River Manufacturing Company

    (SRMC) manufacturing industry based on farms economy which designs and produces farm and utility

    trailers, specialized livestock carriers, and mobile home chassis.

    The case provides information to look into the deteriorating financial position of the SRMC over the time

    period. Data for the year 2003, 2004, and 2005 provides the information that SRMC is doing quite well in

    the year 2003. SRM had experience high and relatively steady growth in sales, assets and profit.

    However, due to recession starts of the 2000s in nations farm economy towards the end of 2003, things

    began to stand adversely for SRM with fall in demand. The analysis of data shows that the company has

    very difficult time in the year 2005 where most of the indicators are very weak. While analyzing the case,

    it is observed that the company has very difficult time in the year 2005.

    List of Financial Statement of SRM

    Silver River Manufacturing Company

    Balance Sheet for Year Ended December 31 (USD in 000)

    Particulars 2003 2004 2005

    Assets

    Cash 5,148.31 4,002.48 3,905.77

    Account 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, Building, 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

    Account 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

    Mortagage 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

    3| Financial Analysis of Silver River Manufacturing Company

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    Some of the key chain events that lead SRM to declining financial position are as follows:

    1. Aggressively Reduced price to stimulate sales with believe that key to sustained profits and

    superior market performance was sales growth and achievement of high share of Market.

    2. Increase in production and inventories to meet sales forecast.

    3. Steep Increase in Accounts receivable (especially in 2005) due to favorable credit terms and

    relaxed credit standards as a part of integrated market penetration plan.

    4. Increase in Long-Term (2004), and short-term credit lines in both 2004 and 2005.

    The given financial statement and calculation of various ratios indicates that if the firmed steps are not

    being taken, the probability of bankruptcy is very high. All the indicators are very weak and it is a hard

    time to think upon to boost the financial position of the organization.

    SRMC has taken loan from Marian Country National Bank (MCNB) and bank is very much concern

    about the repayment of loan after analyzing the financial data provided by SRMC. The analysis shows

    that ratios under all the four categories (liquidity, leverage, assets management and profitability ratios)

    have fall over the time period and it is worst in the year 2005. The ratios for 2005 suggest that the

    company could go to the bankruptcy in near future. These analyses compel bank to think of the

    immediate repayment of loan and could force into bankruptcy, which is the legal right of the bank

    Therefore, SRMC forecasted the projected financial statement of the company for next two years taking

    some of the firmed measures like increasing sales in very lucrative area and moving away from traditional

    agriculture, reducing cost of goods sold, administration and selling expenses and miscellaneous expenses,

    reducing average collection period to convince the bank to reclassification of loan. Moreover, SRMC is

    also thinking to ask for more loan of $6,375,000 for the new plant assuming that this step led to company

    to expand its business and strengthen financial position.

    5| Financial Analysis of Silver River Manufacturing Company

    Financial Indicator Summary 2003 2004 2005

    1.EBIT 19,318.73 13,967.64 4,443.37

    2. Total Assets 55,944.31 70,939.97 96,101.00

    3. Net Sales 170,997.50 184,658.25 195,731.63

    4.Total Market Value of shares (in $ 000)= Totalearnings *P/E Ratio 62,128.31 33,664.01 3,473.09

    5. Total Liabilities 22,637.63 32,869.51 57,464.29

    6. Current Assets 41,179.81 55,493.35 79,921.25

    7. Current Liabilities 13,393.88 20,706.01 45,562.17

    8. Retained Earnings 10,037.68 14,801.45 15,367.72

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    Finally, this case provides opportunity to analyze financial data of the SRMC and place our independent

    opinion on the number of financial analysis indicators including financial statement, which helps us to

    strength our capabilities to compare financial position within the company and between the companies for

    forecasting the future course of action.

    Financial Performance of SRM: Strength and Weakness

    SRMs 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 in all respects of business which is evident from

    the following statement of changes in financial positions and analysis of key financial ratios.

    Analysis on changes in Financial Position Year ended December 31Analysis on changes in Financial Position Year ended December 31

    The reason for the negative balance is because of increase in credit purchase (AP and NP),

    reduction in price to increase sells, increases in administrative and miscellaneous expenses.

    The negative balance shows that the organization in not in a position to pay current debt without

    liquidating any long-term assets.

    After calculating the changes in Financial Position for 2005, it was observed that in totality Net

    Working Capital is negative. This analysis shows that the organization's Current Liability is more

    than Current Asset.

    6| Financial Analysis of Silver River Manufacturing Company

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    Statement of Ratio and Analysis:Statement of Ratio and Analysis:

    7| Financial Analysis of Silver River Manufacturing Company

    Silver River Manufacturing Company

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

    Particulars 2004 2005

    Sources of Funds

    Net Income after taxes 6,351.70 755.02

    Depreciation 1,657.50 2,040.00

    Funds from Operation 8,009.20 2,795.02

    Long Term loan 3,187.50

    Net decrease in working capital 428.26

    Total Sources 11,196.70 3,223.28

    Application of funds

    Mortage 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 7,001.41

    Total uses 11,196.71 3,223.27

    Analysis of changes in working capital

    Increase (decrease) in current assets

    Cash change (1,145.83) (96.71)

    Account Receivable change 1,364.25 10,894.86

    Inventory change 14,095.12 13,629.75

    CA change 14,313.54 24,427.90

    Increase (decrease) in current liabilities

    Account Payable change 3,742.13 9,492.38

    Short-term bank loan change 1,912.50 13,132.50

    Accruals 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)

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    Silver River Manufacturing Company

    Ratio Analysis Year Ended December 31

    Particulars 2003 2004 2005 Industry Average

    Liquidity ratios

    Current ratio 3.07 2.68 1.75 2.50

    Quick ratio 1.66 1.08 0.73 1.00

    Leverage ratios

    Debt ratio(%) 40.46 46.33 59.80 50.00

    Times interest earned 15.89 7.97 1.49 7.70

    Asset management ratios

    Inventory turnover (Cost)a 7.14 4.55 3.57 5.70

    Inventory turnover (Selling)b 9.03 5.59 4.19 7.00

    Fixes assets turnover 11.58 11.95 12.10 12.00

    Total asset turnover 3.06 2.06 2.04 3.00

    Average collection period 36.00 35.99 53.99 32.00

    Profitability ratios

    Profit margin (%) 5.50 3.44 0.39 2.90

    Gross profit margin (%) 20.89 18.70 14.86 18.00Return on total assets 16.83 8.95 0.01 8.80

    Return on owners equity 28.26 16.68 0.02 17.50

    Potential failure indicator

    Altman Z factor 3.09 2.62 2.04 1.81/2.99

    where,

    X1 0.50 0.49 0.36

    X2 0.18 0.21 0.16

    X3 0.35 0.20 0.05

    X4 2.75 1.03 0.06X5 3.06 2.60 2.04

    Ratio Analysis

    8| Financial Analysis of Silver River Manufacturing Company

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    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.

    However, the Altman Z-Factor for 2004 and 2005 became 2.6 and 2.88 respectively, which lies in the

    Grey Zone. It shows that there is a probability for bankruptcy in near future. Therefore the SRMC should

    work closely to improve its overall financial position.

    Liquidity Ratio

    Both the Liquidity Ratios (Current & Quick) are low as compared to the Industry average. So SRMC does

    not have sound financial position to pay its current debt in time.

    Leverage Ratios

    Debt Ratio compared to Industrial Average is very high. This indicates the company has more debt

    compared to its Assets. Times interest earned is very low in comparison to industries average. This

    indicates that companys interest paying capacity is very low. This is a Key Performance Indicator (KPI)

    for the bank to approve the loan proposal.

    Asset Management Ratios

    Under Assets Management Ratio, Inventory Turnover Ratio for 2005 is lower than the Industrial Average

    as well 2003 and 2004. This ratio indicates that Inventory Turnover Days is very high (102 days) that

    means SRMC takes longer time to convert the raw material to Fixed Assets. Likewise, Average

    Collection Period is also high. That means more number of days required for the collection of receivables

    where as Assets Turnover Ratio is also low. However Fixed Assets Turnover Ratio seems satisfactory.

    Profitability Ratio

    Profitability Ratio seems to be alarming. Profit Margin, ROA and ROE are significantly low. These ratios

    indicate low return on sales, assets and equity. Based on the financial data, it seems that this is because of

    the excessive expenditure and lower selling price.

    9| Financial Analysis of Silver River Manufacturing Company

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    In conclusion, based on the comparison of different ratios, we found that the situation is not favorable.

    Liquidity Ratios dont meet standard limit of 2.1 and 50%. Likewise, Interest Earned Ratios that indicates

    the repaying of interest of the SRMC is also very low. These ratios show that SRM doesnt have

    capabilities to pay its debt and to generate sufficient profit. Therefore SRM should work on to reduce its

    expenditure and standardize the price of goods to increase the profit margin. It is also important to reduce

    the collection period and maximize the profit.

    Du-Pont Identity

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

    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

    Du-Pont was developed by Du-Pont Corporation, which is a famous way of decomposing ROE into its 3

    components viz. Profitability Margin, ROA and Equity Multiplier. Here Du-Pont Analysis indicates that

    the SRMC should focus to increase sales, reduce its expenses and maintain the price of the goods to

    increase profit margin.

    Before 2004, profitability ratios were very controlled and were in increasing trend so SRM maintained

    Net profit margin, Total Assets Turnover and Equity multiplier compared to industry average. Return on

    equity is high so as to increase the limit of debt portion.

    After 2004, the position of SRM changed due to lack of demand for farm equipment, so profitability

    decreased. SRM increased its production units to increase profitability. 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

    relaxed 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.

    10| Financial Analysis of Silver River Manufacturing Company

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    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.

    Case Problems

    Projection financial statement for year 2006 and 2007 of SRM and analyze the financial ratios and facts

    figures that will relevant for further business decision to Mr. White and negotiate with MCNB for renewal

    and extension of credit facilities. Judgment relating to extent new short-term credit facility of $6.375

    million to SRM assuming the expectations of SRM for 2006 and 2007 materialize.

    The objectives are:

    1. Analyze SRMs ability to retire its loans in 2006 and/or 2007.

    2. Analyze SRMs ability to pay dividends as well as maintain minimum cash balance.

    3. Analyze from the banks perspective regarding extension of existing loans and possibilities of renewal.

    4. Analyze the alternatives credit withdraws by bank.

    Projected financial statements for projected sales and expenses based on following assumptions:

    1. Mr. White's forecasts shall materialize

    2. MCNB shall disburse additional short term loan of $6,375,000.00 to SRM

    3. SRM shall be able to repay the loan by the sales from new plant by June 2006

    4. The company does not pay dividends.

    5. Cash is the balancing figure of 2006 and 2007.

    Expectations 2006 2007 Remarks

    Weighted Avg. Sales Growth 6% 9.50% of previous year sales

    Cost of Goods Sold 82.50% 80% of sales

    Administrative Expenses 8% 7.50% of sales

    Miscellaneous Expenses 1.75% 1.25% of sales

    Average Collection Period 32 days 32 days par with industry average

    Inventory Turnover (cost) 5.7 times 5.7 times par with industry average

    PE Ratio 5.5 6.5

    Interest rate 16% 16%

    Federal and State Tax 48% 48%

    11| Financial Analysis of Silver River Manufacturing Company

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

    Silver River Manufacturing Company

    Pro Forma Income Statements (Projected)

    Worksheet for Year End 2007 (Thousands of Dollars)

    Particulars 2005 2006 Projected 2007 Projected

    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

    Earning before Interest and tax 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 mortagage 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

    Silver River Manufacturing Company

    Pro Forma Balance Sheets (Projected)

    Worksheet for Year End 2007 (Thousands of Dollars)

    Particulars 2005 2006 Projected 2007 Projected

    Assets

    Cash 3,905.77 36,060.25 46,021.00Account 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 84,531.87 98,101.00

    Land, Building, 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

    12| Financial Analysis of Silver River Manufacturing Company

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    Total assets 96,101.00 104,664.12 117,287.76

    Liabilities and equities

    Short-term bank loans 18,232.50 24,607.50 24,607.50

    Account 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

    Mortagage 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 23,268.75 23,268.75

    Retained earnings 15,367.72 19,825.61 29,534.23

    Owners' equity 38,636.72 43,094.36 52,802.98

    Total Capital 96,101.01 104,664.12 117,287.76

    Silver River Manufacturing Company

    Ratio Analysis Year Ended December 31, 2007 (Projected)

    Particulars 20052006Projected

    2007Projected

    IndustryAverage

    Liquidity ratios

    Current ratio 1.75 1.69 1.85 2.50

    Quick ratio 0.73 1.09 1.25 1.00

    Leverage ratios

    Debt ratio(%) 59.80 58.83 54.98 50.00

    Times interest earned 1.49 2.69 4.69 7.70

    Asset management ratios

    Inventory turnover (Cost)a 3.57 5.70 5.70 5.70

    Inventory turnover (Selling)b 4.19 6.91 7.12 7.00

    Fixes assets turnover 12.10 10.31 11.84 12.00

    Total asset turnover 2.04 1.98 1.94 3.00

    Average collection period 53.99 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 0.01 0.04 0.08 8.80

    Return on owners equity 0.02 0.10 0.18 17.50

    13| Financial Analysis of Silver River Manufacturing Company

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    With assumption SRM Company have changed its policy of aggressive marketing sales promotion, full-

    margin pricing, maintain standard industry credit terms and have tightened the credit standards. With this

    policy they have been able to reduce some of the expense and Cost of Goods Sold:

    Cost of Goods Sold (COGS): 85 %( 2005) to 82.5% (2006) & 80 %( 2007).

    Administrative Expenses: 9 %( 2005) to 8% (2006) & 7% (2007).

    Miscellaneous Expenses: To 1.75 %( 2006) & 1.25(2007).

    In conclusion, the Table 9 and 10, projection for 2006 and 2007 give the picture that the 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).

    Projected ratio for 2006 and 2006 are somehow positive. However, we cannot find very positive report or

    improvement in ratios. Due to increase in sales and income and decrease in expenses there are significant

    improvement found in time interest earned, profit margin ROA and ROE. Moreover Asset Management

    Ratios are also improved. Under Liquidity Ratios, the current ratio is not much improved to pay the

    current debt but quick ratio indicates that the SRM Company is also able to pay current debt.

    Overall, we can say that the SRM Company financial position shows improvement in number of areas but

    still there is a need to improve a lot. Debt ratio is still high and SRM Company should work in various

    areas to meet the industry average for the better future.

    14| Financial Analysis of Silver River Manufacturing Company

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    Revised Projected Financial Statement

    Silver River Manufacturing Company

    Pro Forma Income Statements (Revised)

    Worksheet for Year End 2007 (Thousands of Dollars)

    Particulars 2005 2006 Revised 2007 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

    Earning before Interest and tax 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 mortagage 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

    Silver River Manufacturing CompanyPro Forma Balance Sheets (Revised)

    Worksheet for Year End 2007 (Thousands of Dollars)

    Particulars 2005 2006 Revised 2007 Revised

    Assets

    Cash 3,905.77 11,106.19 20,175.54

    Account 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 59,577.81 72,255.54

    Land, Building, Plant and Equipment 22,873.50 29,248.50 30,125.96Accumulated 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 79,710.06 91,442.30

    Liabilities and equities

    Short-term bank loans 18,232.50 - -

    Account Payable 19,998.39 15,994.88 16,794.62

    15| Financial Analysis of Silver River Manufacturing Company

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    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 23,268.75 23,268.75

    Retained earnings 15,367.72 19,479.05 28,296.02

    Owners' equity 38,636.72 42,747.80 51,564.77

    Total Capital 96,101.01 79,710.06 91,442.05

    Silver River Manufacturing Company

    Ratio Analysis Year Ended December 31, 2007 (Revised)

    Particulars 2005 2006 Revised2007Revised

    IndustryAverage

    Liquidity 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 earned1.4

    9 4.38 21.05 7.70

    Asset management ratios

    Inventory turnover (Cost)a 3.57 5.70 5.70 5.70

    Inventory turnover (Selling)b4.1

    9 6.91 7.12 7.00

    Fixes assets 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

    Profitability ratios

    Profit margin (%) 0.39 2.64 5.17 2.90

    Gross profit margin (%)14.8

    6 17.50 20.00 18.00

    Return on total assets 0.01 0.07 0.13 8.80

    Return on owners equity 0.02 0.13 0.23 17.50

    With revised projected data for 2006, 2007, presented in table 12, 13 and 14 it is found that the SRM

    Company is not able to pay regular dividend and minimum cash balance in 2006. However, the situation

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    is progressive in 2007 where SRM Company can pay regular dividend and maintaining minimum cash

    balance. If that shot-term loan is paid 2006 the cash balance will be $ 4,736(000), which is less than 5%

    of sales. Whereas the cash balance will be $ 12,204(000) which is more than 5% of sales. Thus,

    If SRM Company can pay dividend but it has various impact as the ratios. Minimum cash balance is

    essential for the SRM Company. However, it seems that minimum cash balance (MCB) of 5% of total

    sales, ultimately affect on various ratios like current ratio, quick ration.

    If SRM Company cannot invest this cash to generate income, which adversely affect as the overall profit

    and ultimately effect on the interest earned ratio as well. Those SRM Company who can able to roll out

    money more frequently in business can earn more profit reduce turnover ratio and improve overall

    financial position.

    To conclude figures on table 14 shows that the entire ratios of are progressive and in year 2006 which

    result better positioning than industry average which represent the strong financial improvement over year

    2003.

    From MCNB Prospective

    Based on the projected ratio analysis, income statement and balance sheet for the year 2006 and 2007, It

    is justifiable that the bank should extend the existing short-term loans and grant the additional $6,375,000.

    It is also to note that company also revised policy as follows:

    1. Targeting lucrative market area and moving away from traditional agriculture.

    2. Full margin pricing,

    3. Standard industry credit terms

    4. Tighter credit standard

    5. Reduction on cost of goods sold.

    6. Reduction in administrative and selling expenses and miscellaneous expenses.

    As per figures of table 9, 10, 11, 12, 13, 14, even in both projected and revised case. This increased the

    net income significantly and also improved times earning ratio that is one of the important ratios to pay

    the interest. However, the debt ratio is still more than 50% but there are significant improvement noted in

    other ratios except Total Assets Turnover. On the top improvement in current and liquidity ratios indicate

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    that the company is able to pay its current liabilities with the existing current assets within the year 2006

    and 2007.

    Therefore, taking some measures, bank can rely on the company that the loan will be paid on time.

    Remedies and Recommendations

    As there is highest probability that MCNB will both extend credit lines and provide extra $6,375,000 loan

    to support new plan. However for worst situation if bank didnt extend lines, call for immediate

    repayment. We suggest the following alternative steps,

    Submit proposal to another bank with its projected financial statement and explain the various

    measures undertaken by SRMC.

    Reduce 5% cash balance policy and invest to the business for rolling out the business transaction.

    Focusing on maintaining full margin pricing, Standard industry credit terms, tighter credit

    standard

    Reduce the size and concentrate on increasing of existing volume by more focusing on marketing

    reducing cost of goods sold, administrative, selling and miscellaneous expenses.

    Conclusion

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    After all the reviews and analysis of SRM Company financial statements and we have concluded that this

    company financial position has been falling since 2003 till 2005. So, in order to improve it financial

    Position Company is willing to undertaken various majors policy of aggressive sales promotion on

    lucrative market segment and moving away from traditional market area as business strategic measures

    and should also ensure financial measures as full margin pricing, maintain standard industry credit terms

    and tighten the credit standards as a financial measures. With these expected changes SRM Company has

    projected very strong financial statement for next 2 years. With this projected and revised financial

    statement we can assume that SRM Company will be able to retain back its financial status in the market

    for the years to come.

    Lesson learnt

    Every Organization should keep track and updated with its business environment and should revise

    its strategic and operation.

    Every organization should keep the track and updates with its financial statement on regular basis

    in order to avoid, revise and control unfavorable suitation.

    Organization should be able to revise its policy in order to achieve the required goals or target

    under any circumstances.

    Annex -1| Graphical Presentation

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    14)Earnings Per Share:

    15)Market Price Per Share (MPS)

    16)Dividend Pay Out Ratio

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

    Where, X1 = x 100

    X2 = x 100

    X3 =

    X4 =

    X5 =

    18) Du-Pont identity

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

    24| Fi i l A l i f Sil Ri M f i C