Fm03 Siver River2012

7/29/2019 Fm03 Siver River2012

1/16

3 - 1

Copyright by R. S. Pradhan All rights reserved.

Welcome to Silver River ManufacturingCompany


2/16

3 - 2


SRM: Balance sheet

*Common size (table 4) shows that cash balance reduced from 9% in2003 to 4% in 2005. Excess cash to shortage position.

** Relaxed credit standard.@ Demand decreased.

Assets 2003 2004 2005Cash 5,663 4,403 4,296*Receivables 18,808 20,308 32,293**Inventories 20,827 36,332 51,324@

Total cu rrent ass ets 45,298 61,043 87,913

Land, bldg, plt & equip. 19,537 22,110 25,161Less depreciation (3,296) (5,119) (7,363)

Net fixed assets 16,241 16,991 17,798Total assets 61,539 78,034 105,711


3/16

3 - 3


* But not enough.** Late in paying accounts payable.

Liabilities and Equities 2003 2004 2005

Short-term bank loans 3,506 5,610 20,056*Accounts payable 7,440 11,557 21,998**Accruals 3,787 5,610 8,064

Tot al cu rrent l iabil i t ies 14,733 22,777 50,118Total liabilities 24,901 36,156 63,211Common stock 25,596 25,596 25,596Retained earnings 11,041 16,282 16,904Total liabilities andequity 61,539 78,034 105,711


4/16

3 - 4


* Reduced priceBanks deficiency report shows deteriorating fin. position. Aggressive expansion on the asset side. Signed plant expansion contract

that requires about $7m in the begin. of 2006.

Income Statement for the year ending December 312003 2004 2005

Net Sales 188,097 203,124 215,305Cost of goods sold 148,795 165,144 183,307

Gross profit 39,303 37,980 31,998Admn. & selling 14,069 16,879 18,569Depreciation 1,753 1,823 2,244Misc expenses 2,230 3,913 6,297Total operating expenses 18,052 22,615 27,110EBIT 21,251 15,364 4,888

Interest on STLoan 351 617 2,006Interest on LT loan 701 1,052 1,052Interest on mortgage 286 259 233

Earnings before taxes (EBT) 19,913 13,436 1,597Taxes @ 0.48 9,558 6,449 767

Net income 10,355 6,987 831Dividend on stock @25% 2,589 1,747 208

Addition to retained earnings 7,766 5,240 623**


5/16

3 - 5


SRM failed to meet contractual requirement; CR,QR & debt ratio of 2.1,1.0, & 55% respectively.

Drastic curtailment of demand.Altman Z factor declined to 2.88 (2005).Likelihood of bankruptcy has increased.

Corrective measures: To solve the problem SRM reduced the priceaggressively.Followed relaxed credit standard.

Results: Inventories started to increase.Receivables increased dramatically Delay inpayment of accounts payable.


6/16

3 - 6


Question (1a): Complete Table 6. Statement of Changes in FinancialPosition (Year Ended Dec. 31) 000 $

Particulars 2,004 2,005 Sources of fundsNet income after taxes 6,987 Depreciation 1,823

Funds from operations 8,810 Long-term loan 3,506 Net decrease in working capital

Total sources 12,316

Application of fundsMortgage change 295 Fixed assets change 2,574 Dividends on stock 1,747 Net increase in working capital 7,702

Total uses 12,316

Analysis of changes in working capital 2,004 2,005 Increase (decrease) in current assetsCash change (1,260)

AR change 1,501

INV change 15,505 CA change 15,745

Increase (decrease) in current liabilitiesNP change 2,104

AP change 4,116 ACC change 1,823

CL change 8,043 Net increase (decrease) in working capital 7,702 -


7/16

3 - 7


Financial ratios 2003 2004 2005 Ind. CommentLiquidity ratio

1. CR, Times * 3.07 2.68 2.52. Quick ratio *, Times 1.66 1.08 1 Leverage ratio

3. TD/TA, % 40.46 46.33 504. TIE, Times 15.89 7.97 7.7

Asset management or efficiency or turnover ratio 5. Inv turn.(COGS), Times 7.14 4.55 5.76. Inv. turn. (sales ), Times 9.03 5.59 77. FA turnover, Times 11.58 11.95 128. TA turnover, Times 3.06 2.60 39. Ave. coll. pd 36.00 35.99 32

Profitability ratio 10.Net profit margin,% 5.5 3.44 2.9

11.Gross profit margin,% 20.89 18.7 1812. Return on TA, % 16.83 8.95 8.8 13. ROE, % 28.26 16.68 17.5

Z score 6.69 4.75 2.88 1.81-2.99EPS $2.69 $1.81 $0.22MPS $17.8 $9.7 $1.02PE , Times 6.6x 5.4x 4.7x* Some of the recs are not collectible. CR & QR are overstated.

Question (1b): Complete Table 7: Financial ratios for 2005.Question 2: What are the strengths & weaknesses?


8/16

3 - 8


Dupont identity: ROE = NI/Sales TA turnover EM=TA/EqFirm 2003 = 5.5 3.06 1.7

Industry 2003 = 2.9 3 2Good Good GoodFirm 2004 = 3.4 2.6 1.9Industry 2004 = 2.9 3 2

Good Poor GoodFirm 2005 = 0.4 2.1 2.5Industry 2005 = 2.9 3 2

Poor Poor Poor SRM is deficient in each ROE determinants.

Corrective measures: Review pricing policy. Price discounts have not yieldedincrease in sales to off set discount.

Reduce investment in receivables & inventories.Control costs: COGS needs to be decreased.


9/16

3 - 9


Question 3: Complete tables 9 & 10. (Bank to provideloans & SRM to pay no dividends). Could the bank repayall STLs?

First project the following:2005 2006 Proj 2007 ProjNet sales $ 215,305

COGS (% of sales) 82.5% 80%

Adm & selling exps. 8% of S 7.5% of S Misc exps 1.75% of S 1.25% of S

Receivables

(IA DSO=32days, sales basis)Inventory

(IA Inv turn=5.7x, COGS basis)


10/16

3 - 10


Table 9: Proforma Income statement (brwg for 1 yr, no div .)Net Sales 215,305

Cost of goods sold 183,307Gross profit 31,998

Admn. & selling 18,569Depreciation 2,244 2,665 2,006

Misc expenses 6,297

Total operating expenses 27,110EBIT 4,888Interest on STLoan 2,006 4,331 4,331Interest on LT loan 1,052 1,052 1,052

Interest on mortgage 233 210 189Earnings before taxes (EBT) 1,597

Taxes @ 0.48 767Net income 831

Dividend on stock 0.25 208 - -

Addition to retained earnings 623


11/16

3 - 11


Table 10: SRM : Proforma Balance Sheets (Projected)Assets 2,005 2006 Proj 2007 Proj

Cash 4,296Receivables 32,293Inventories 51,324Total current assets 87,913Land, bldg, plt & equip. 25,161 32,173 33,139Less depreciation (7,363) (10,028) (10,939)Net fixed assets 17,798 22,145 22,199Total assets 105,711Cash balance 5% of sales

Liabilities and Equities 2,005 2006 Proj 2007 ProjShort-term bank loans 20,056 27,068 27,068

Accounts payable 21,998 17,594 18,474 Accruals 8,064 10,231 12,789Total current liabilities 50,118 54,894 58,331Long-term bank loan 10,519 10,519 10,519

Mortgage 2,574 2,314 2,083Long-term debt 13,092 12,833 12,602Total liabilities 63,211 67,727 70,933Common stock 25,596 25,596 25,596Retained earnings 16,904Owners' equity 42,500Total liabilities and equity 105,711

SRM is able / not able to repay all ST loans by 2006?


12/16

3 - 12


2005 2006 Prj 2007 Prj Ind. CR Comment1. CR, x 1.75 1.69 1.83 2.5 2 Poor but improving2. QR, x 0.73 1.09 1.23 1.0 1 OK 3. TD/TA, % 59.80 58.83 54.98 50.0 55 Poor but improving 4. TIE, Times 1.49 2.69 4.6 7.7 Poor but improving5. Inv turn.(COGS) 3.57 5.70 5.70 5.7 OK6. Inv. turn.(sales) 4.19 6.91 7.13 7.0 OK7. FA turnover 12.10 10.31 11.3 12.0 OK8. TA turn. 2.04 1.98 1.94 3 Poor 9. DSO 53.99 32 32 32 OK 10.NPM,% 0.39 2.15 4.27 2.9 OK 11.GPM,% 14.86 17.5 20 18 OK12.ROA, % 0.79 4.26 8.28 8.8 OK 13.ROE, % 1.95 10.34 18.39 17.5 OK Altman z 2.88 3.31 3.98 1.81-2.99 OK

Situation is improving but non-payment of div is not good.

Question 4: Complete table 11. Project fin. Ratios.


13/16

3 - 13


Question 5: Complete tables 12, 13 & 14. (If div. are paid & brwg is donefor 1/2 year only, could the firm repay all STLs & maintain min cash?)

Table 12: Proforma Income Statement 2,005 1996 Rev 1997 Rev

Net Sales 215,305Cost of goods sold 183,307Gross profit 31,998

Admn. & selling 18,569Depreciation 2,244 2,665 2,006

Misc expenses 6,297Total operating expenses 27,110EBIT 4,888Interest on STLoan 2,006 2,165 -Interest on LT loan 1,052 1,052 1,052

Interest on mortgage 233 210 189Earnings before taxes (EBT) 1,597

Taxes @ 0.48 767Net income 831

Dividend on stock 0.25 208

Addition to retained earnings 623


14/16

3 - 14


Table 13: SRM: Proforma Balance Sheets (Revised)Assets 2005 2006 Rev 2007 Rev

Cash 4,296Receivables 32,293Inventories 51,324Total curr ent assets 87,913Land, bldg, plt & equip. 25,161 32,173 33,139 Less depreciation (7,363) (10,028) (12,033) Net fixed assets 17,798 22,145 21,105 Total assets 105,711Cash balance @ 5% 10,765 11,411 12,495Liabilities and Equities 2005 2006 Rev 2007 RevShort-term bank loans 20,056 - -Accounts payable 21,998 17,594 18,474Accruals 8,064 10,231 12,789Total cu rrent l iabil i t ies 50,118 27,826 31,263Long-term bank loan 10,519 10,519 10,519Mortgage 2,574 2,314 2,083Long-term debt 13,092 12,833 12,602Total liabilities 63,211 40,658 43,865Common stock 25,596 25,596 25,596Retained earnings 16,904Owners' equity 42,500Total liabilities and equity 105,711


15/16

3 - 15


Table 14: Revised financial ratios Ratios 2005 2006 Rev 2007 Rev IA Cnt req

Cmt

1. CR, x 1.75 2.5 22. Qk ratio, 0.73 1.0 1 3. TD/TA, % 59.80 50.0 554. TIE, Times 1.49 7.7

5. Inv turn.(COGS) 3.57 5.76. Inv. turn. (sales) 4.19 7.07. FA turnover,x 12.10 12.08. TA turn. 2.04 3

9. DSO 53.99 32 10.NPM,% 0.39 2.9 11.GPM 14.86 18.0 12.Return on TA 0.79 8.8

13. ROE, % 1.95 17.5


16/16

3 - 16


Question 6. On the basis of your analyses, do you thinkthat the bank should:a) extend the existing short- and long-term loans & grant

the additional $7,012,500 loan, or b) extend the existing short- and long-term loans without

granting the additional loan, or c) demand immediate repayment of both existing loans?

If you favor (a) or (b) above, what conditions (collateral,guarantees, or other safeguards) should the bankimpose to protect itself on the loans?

Question 7. If the bank decides to withdraw the entire lineof credit and to demand immediate repayment of the twoexisting loans, what alternatives would be open to SRM?

What lessons do we learn from the case? Thanking you.

Fm03 Siver River2012

Documents

Transcript of Fm03 Siver River2012