Professional Documents
Culture Documents
River Manufacturing
Company
The Financial management case
1. General Background
Silver River manufacturing organization is a large regional product if a farm and it is an
agribusiness supplier who relies on upon agriculturists for 45-50 percent of its aggregate
deals. In the decade before 2003, SRM had encountered high and moderately enduring
development in deals, resources and benefits. Greg White the president of SRM was very
little worry about the budgetary position of the association yet after the end of 2003, the
interest for new field trailers in the citrus and vegetable commercial ventures began to tumble
off and Marion Nation National Bank likewise attempted to survey his credit installment
framework. The retreat that had been tormenting the country's ranch economy and appalling
stops for two straight winters brought about high abbreviation of interest for woods retailer
and citrus transport bearers; SRM was not insusceptible to this. In spite of the fact that SRM
had demonstrated high and relentless development in deals, resources and benefits preceding
2003, on the other hand, towards the end of 2003 the interest for new field trailers in citrus
and vegetable commercial ventures began for tumble off. SRM was likewise influenced by
the retreat and on the highest point of this the business went down steadily. Then again, his
agrarian items were likewise influenced by the terrible atmosphere.
SRM in outlining trailers for their new offerings, and these river trailer packages are sold
through across the country merchant systems of the support organizations. With couple of
special cases, the products produced by SRM are not subject to innovative obsolescence or
to decline, and in those occasions where innovation is an element to be viewed as, SRM
holds a few licenses with which it can mostly balance a portion of the dangers. Marion Area
National Bank (MCNB) is the official investor of SRM that has authorized short and long
haul credit offices. MCNB considered SRM to be a monetarily stable and effectively
overseen firm until the manifestations of sickness of SRM surfaced. Being a nearby
companion and a well-wisher, Miss Lesa Nix, VP of MCNB, advises Mr. White that the
money related wellbeing of SRM intensified from 2004 through 2005 such that MCNB
should seriously mull over getting back to back the credit offices while SRM has made a
promise to extend its office obliging an extra reserve of $7,012,500 . Mr. White Had wanted
to get this extra cash by a transient credit from MCNB.
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expected to gather the cash due and decrease the bank's presentation as fast as practicable. So
as to keep away from renaming, SRM obliged solid and persuading proof to demonstrate that
its issues was interim in nature and it had great shot of turning around the pattern.
Consequently, to back these increments in resources, SRM changed to Marion Nation
National Bank, (MCNB) for long pull advance in 2004 and increment in its transient credit
advance in both 2004 and 2005.MCNB had been a noteworthy financier of SRM for quite a
while. In the beginning, Lesa Nix, the VP of MCNB, had taken care of the instance of SRM.
Later, she got advanced and was no more in charge of taking care of SRM's record. On the
other hand, as Mr. White was a nearby companion, despite everything she took unmistakable
fascination on SRM. Indeed, even this was inadequate to cover the forceful extension on the
benefit side. Thusly, Greg White who constantly made brief installments began to defer
installments. This came about significant increment in records payable and other transient
credits.
The current financial related issues were not by any means the only issue Mr. White
confronted. He had as of late marked an agreement for a plant extension that would require
another $7012500 of the capital amid the first quarter of 2006. He had wanted to get this cash
by a fleeting advance from MCNB to be reimbursed from the benefit created in the first a
large portion of 2006. He accepted that new offices would improve the generation capacities
in an extremely profitable territory of custom steed van.
As per Mr. White's investigation, the money related position of the organization could
enhance fundamentally throughout the following two years if the bank kept up or even
expand the credit lines. Once the new office is goes on the web, the organization would have
the capacity to build yield in quickly growing(and especially beneficial) horse van and home
body section of the business furthermore lessen the reliance on ranch and light utility trailer
deals to 35% or less. He additionally anticipated that the business development would be 6%
and 9.5% in a normal for 2006 and 2007 individually, expecting there is no huge change in
either national or homestead economy. He likewise expected that SRM would change its
strategy of forceful advertising and deals advancement and come back to full edge costs,
standard industry credit term and more tightly credit benchmarks. These progressions would
decrease expense of products sold to 85% in 2005 and 82.5% in 2006 and 80 % in 2007.
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Correspondingly regulatory and offering costs are liable to diminish from 9% to 8% in 2006
and 7.5% in 2007. Additionally, the various costs would decrease to 1.75% and 1.25% of
offers in 2006 and 2007 individually. Normal gathering period and stock turnover will be
kept up at normal industry level.
With respect to money related information gave for the situation and the anticipated salary
articulation and asset report, we need to break down whether SRM is qualified to get the
bank credit. Presently, the inquiry is whether the bank ought to broaden the current short and
long haul credits or ought to rather request quick reimbursement of both existing advances.
What's more, we need to propose options accessible to SRM if the bank were to choose to
withdraw the whole line of credit and to request quick reimbursement of the two current
advances.
The best way to stop SRM to go in bankruptcy is to persuade the senior credit board of
trustees with solid and persuading proof that Silver River assembling present challenges were
impermanent in nature. That suitable activities intended to beat the issue had been taken, and
that the chance for accomplishment in turning around the pattern was reasonably great.
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2004
2005
6,987.24
1,823.00
8,810.24
3,506.00
12,316.24
830.44
2,244.00
3,074.44
(471.00)
3,545.44
Applications of Funds
Mortgage Changes
Fixed Assets Changes
Dividend on Stock
Net Increase in working Capital
Total Uses
295.00
2,573.00
1,746.81
7,701.00
12,315.81
287.00
3,051.00
207.61
3,545.61
(1,260.00)
1,500.00
15,505.00
15,745.00
(107.00)
11,985.00
14,992.00
26,870.00
4,117.00
2,104.00
1,823.00
8,044.00
7,701.00
10,441.00
14,446.00
2,454.00
27,341.00
(471.00)
Funds flow statement, table: 6 shows changes or movement of funds or changes in working
capital of Silver River Manufacturing Company. The net sales have a significant increase of
$12181 during the year (2004-2005). The company also made a profit of $183307 during the
year 2005 which exceed the profit for the year 2004. However, the company has also incurred
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additional cost in 2005 as compared to the previous year. Even if the company has made a
significant increase in their sales in 2005 as compared to 2004, it fails to improve the net income.
There was a huge gap between the net incomes for the two consecutive years. It can be said that
the high increase in the cost part has made the company lost their net income. Hence, the bottom
line is the uses of the funds exceeded the source of fund.
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2003
2004
2005
Industry
Comment
Average
for 2005
Liquidity Ratios
Current ratio
Quick ratio
3.07
1.66
2.68
1.08
1.75
0.73
2.50
1.00
Poor
Poor
Leverage ratios
Debt ratio (%)
Times interest earned
40.46
15.89
46.33
7.97
59.8
1.49
50.00
7.70
Poor
Very Poor
7.14
9.03
11.58
3.06
36.00
4.55
5.59
11.95
2.60
35.99
3.57
4.19
12.1
2.04
53.99
5.70
7.00
12.00
3.00
32.00
Poor
Very Poor
Very Good
Poor
Very Poor
Profitability ratios
Profit margin (%)
Gross profit margin (%)
Return on total assets
Return on owners equity
5.50
20.89
16.83
28.26
3.44
18.70
8.95
16.68
0.39
14.86
0.79
1.95
2.90
18.00
8.80
17.50
Very Poor
Poor
Very Poor
Very Poor
3.93
1.81/2.99
Poor
3.49
2.68
Current Ratio
Current Ratio is also known as the liquidity ratio. It measures the companys ability to pay short
term obligations. The current ratio is the financial ratio that measures whether or not a firm has
enough resources to pay its debts over the next 12 months. It is a liquidity and efficiency ratio
that measures a firms ability to pay off its short term liabilities with its current assets. The
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example of current ratio is cash, account receivables, prepaid expenses etc. Current ratio is the
ratio of current assets of a business to its current liabilities.
Current Ratio =Current Assets/ Current Liabilities
For 2005
Current ratio = 87913/50118 =1.7541
Current Ratio
3.5
3
2.5
2
1.5
1
0.5
0
2005
2004
Current Ratio
2003
Industry Average
Current ratio is 1.75 in 2005 which is not good.It implies that paying capacity and conversion
into cash is very low of the company.But the industry liquidity ratio is good.
Quick Ratio
Quick Ratio is also known as the acid ratio, which shows the ratio of cash and other liquid
resources of an organization in comparison to its current liabilities. It measures a companys
ability to meet its short term obligation with its most liquid assets. It is the ratio of sum of cash
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and cash equivalent, marketable securities and account receivables to the current liabilities of a
business. It measures the ability of company to pay its debt by using its cash and near cash assets
i.e. account receivables and marketable securities. Marketable securities are those which can be
converted into cash quickly.
Quick Ratio = Current Assets Inventory - Prepaid
Current Liabilities
For 2005
Quick ratio=36589/50118 =0.7301
Quick Ratio
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
2005
2004
Quick Ratio
2003
Industry Average
The quick ratio is also not good enough. It is 0.73 which shows quick assets proportion is less
than the current liabilities.
Debt Ratio
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Debt Ratio is also known as the Financial Ratio. It is a solvency ratio that measures a firms total
liabilities as a percentage of its total assets. In sense, it shows the companys ability to pay. It is
the proportion of a companys debt to its total assets. It indicates the proportion of a companys
debt to its total assets. It can be measured as:
Debt Ratio = Total Debt/ Total Assets
For 2005
Debt ratio= LTD+TCL/TA =13092+50118/105711 =59.80
2004
Debt Ratio
2003
Industry Average
Debt ratio is not satisfactory average ratio is 48.46 which is slightly below than the industry
average.
Time Interest
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Time Interest Earned Ratio is also known as the Interest Coverage Ratio. It is a measure of how
well a company can meet its interest payment obligations. It is the ratio of earnings before
interest and tax.
Time interest: =EBIT/Interest
=4888/2006+1052+233 =1.4853
2004
Times Interest Earned
2003
Industry Average
The time interest earn ratio is 8.44 but the industry average ratio is 7.70 which is not good to
company.
Inventory Turnover
In Accounting, Inventory Turnover is a measure of the number of times inventory is sold or used
in a time period such as a year. The equation for the inventory turnover equals the cost of goods
sold divided by the average inventory. It shows how many times a companys inventory is sold
and replaced over a period of time. It is a key measure for evaluating just how efficient
management is at managing companys inventory and generating sales from it.
Inventory Turnover (cost) = Cost of goods sold
Average Inventory
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For 2005
Inventory Turnover (cost) =183307/51324 =3.57
2004
Inventory Turnover Cost
2003
Industry Average
Looking towards the Assets management ratios the average inventory turnover (cost) ratio is 5.08
times. But actual average is 5.70.Here not so much difference so it seems to be nice.
Inventory Turnover (sales): Sales/Avg. Inventory
=215305/51324 =4.20times
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2004
Inventory Turnover Selling
2003
Industry Average
Inventory turnover ratio at selling 6.27 times but the actual must be 7 so inventory turnover ratio
at selling is not good enough.
Fixed Assets Turnover Ratio
Fixed Assets Turnover Ratio is the ratio of sales to the value of fixed assets. It indicates how will
the business is using its fixed asset to generate cash. The higher, the ratio is better because a high
ratio indicates the business has less money tied up in fixed assets for each unit of currency of
sales revenue. A declining ratio may indicate that the business is over invested in plant,
equipment or other fixed assets.
Fixed Asset Turnover = Sales/ Fixed Assets
For 2005
Fixed Assets Turnover =215305/17798 =12.10
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2004
Fixed Assets Turnover
2003
Industry Average
Fixed assets turnover ratio is 11.87 times.But there must be 12 times,not so much difference it is
good for the company.
Total Assets Turnover
Assets Turnover is the financial ratio that measures the efficiency of a companys use of its assets
in generating sales revenue or sales income to the better company. Companies with low profit
margin tend to have high assets turnover. Other hand, those which have high profit margin, they
have low asset turnover. Companies in retail industry tend to have a very high turnover ratio
mainly because of competitive pricing.
Assets Turnover = Sales/ Total Asset
For 2005
Total Assets Turnover =205305/105711 =2.04
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2004
Total Assets Turnover
2003
Industry Average
Total assets turnover ratio is 5.68 times. Actual must be 3 times. So the total assets turnover is
not good enough.
Average Collection Period
Average Collection Period is the average number of days between the date that a credit sale is
made and the date that the money is received from the customer. The average collection period is
also referred to as the days sales in account receivable. An Alternate way to calculate the
average collection period is the average account receivable balance divided by average credit
sales per day.
ACP = Days in a year * debtors
Sales
For 2005
Average Collection Period: =360*32293/205305 =54days
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2004
Average Collection Period
2003
Industry Average
Average collection period is 42 days which is not acceptable.The actual must be 32 days but
receivables are collected lately than its time.So this is also the bad situation for the company.The
cash collected fast means the company will get more benefit in the future but if collection are
lately than company loose the opportunity to invest.
Profit Margin
The profit margin is an accounting measure designed to gauge the financial health of a business
or industry. In general, it is defined as the ratio of profits earned to total sales receipts over some
defined periods. A ratio of profitability calculated as net income divided by revenues or net profit
divided by sales. It measures how much out of every dollar of sales a company actually keeps in
earning. It is a measure of profitability which is calculated
by findings the net profit as a percentage of the revenue. A ratio of profitability is calculated as
net income divided by sales.
Profit Margin = Net Income
Sales
For 2005
Profit Margin: =831/215305 =0.3860%
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Profit Margin %
6
5
4
3
2
1
0
2005
2004
Profit Margin
2003
Industry Average
The profit margin ratio is 3.10 %.It is good than the actual profit margin.
Gross Profit Margin
Gross Profit Margin Ratio is also known as the Gross Profit Percentage. Gross Margin Ratio is
computed by dividing the companys gross profit dollars by its net sales dollar. A company
should be continuously monitoring its gross margin ratio to be certain which will results in a
gross profit that will be sufficient to cover its selling and administrative expenses.
Gross Profit Margin = Gross Profit
Sales
For 2005
Gross Profit Margin =31998/215305 =14.86
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20
15
10
0
2005
2004
Gross Profit Margin
2003
Industry Average
Gross profit margin ratio is 18.75% which is actually good for the company.
Return on Total Assets
Return on total assets is the ratio of annual net income to average total assets of a business during
a financial year. It is a profitability ratio that measures the net income produced by total assets
during a period. It provides valuable information to value investors searching for the quality
companies. It gives an indication of the capital intensity of the company, which will depend on
the industries, companies that require large investments. It is calculated as companys net income
divided by its average of total assets.
Return on total assets = Net Income
Total Assets
For 2005
Return on Total Assets =831/105711 =0.786%
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2004
Return on Total Assets
2003
Industry Average
The return on assets is 8.85 which seem to be good enough because the actual return also the
8.80.
Return on Owners Equity
ROE is a profitability ratio that measures the ability of a firm to generate profits from its
shareholders investments in the company. Investors must calculate ROE for a period by first
using the shareholders equity figure from the beginning of a period as a denominator. It is the
amount of net income returned as a percentage of shareholders equity. It tells us how much
profit a business earned in comparison to the book value of its owners equity.
ROE = Net Income
Owners Equity
For 2005
Return on Owners Equity: =831/42500 =0.0195 =1.95%
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2004
Return on Owners Equity
2003
Industry Average
The return on equity is 15.67 which is less than the actual ROE that is 17.50.It implies that the
return on equity is slightly lower than actual.So they need to increase the capital by issuing the
shares.
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2.
3.
ROE
= Profit margin=
Net income
Net sales
Net sales
Total assets
Leverage factor
Total assets
Owner ' s equity
2003
28.24
= 5.5
3.06
1.68
2004
16.69
= 3.44
2.6
1.86
2005
1.98
= 0.39
2.04
2.49
Industry
17.50
2.9
3.00
2003: 10355/188097*188097/61539*61539/36637
=0.0551*3.0568*1.6796
=0.2824
2004: 6987/203124*203124/78034*78034/41877
=0.0344*2.6030*1.8634
=0.1669
2005: 831/215305*215305/105711*105711/42500
=0.0039*2.0367*2.4873
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=0.0198
In Du Pont system ROE is calculated. In the company net profit margin declines from 2003 to
2005.The total assets turnover also decrease from 2003 to 2005.But the equity multiplier increase
from 2003 to 2005.Overall the ROE decline. It represents that the DU Pont system also not good
ROE declines slowly that is in 2003 ROE 0.28, in 2004 ROE 0.17 in 2005 ROE 0.0198.So in the
Overall the financial position of the company is worse.
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Altman's Z- Scores
A Z- Scores is a statistical measurement of a scores relationship to the mean in a group of
scores. A Z-score of 0 mean is same as the mean. It can also be positive or negative, indicating
whether it is above or below the mean and by how many standard deviations. It represents the
distance between the raw score and the population mean in units of the standard deviation. Z is
negative when the raw score is below the mean and positive when above the mean.
Calculation of Z-scores
For 2003
X1 = (CA-CL)/TA =(45298-14733)/61539 = 49.67%
X2 = Retained Earning/Total Assets =11041/61539 =17.94%
X3 = EBIT/TA =21251/61539 =0.3453times
X4:
ME = No. of Shares Outstanding * Market value of share =3849.44*17.79 =68481.54
No. of Sales o/s = NI/EPS =10355/2069 =3849.44
BV = 24901
SO, X4 =ME/BV =68481.54/24901 =2.75
X5 = Sales/TA =188097/61539 =3.0565times
For 2004
X1 = (61043-22777)/78034 =49.0376%
X2 = 16282/78034 =20.87%
X3 = 15364/78034 =0.1969times
X4:
ME = 3860.22*9.64 =37405.53
No. of Share o/s =6987/1.81 =3860.22
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BV =36156
So, X4= 37405.53/36156 =1.03
X5= 203124/78034 =2.6030times
For 2005
X1 =(87913-50118)/105711 =35.75%
X2 =16904/105711 =15.94%
X3 =4888/105711 =0.0462times
X4:
ME =3777.27*1.02 =3852.82
No. of Share o/s =831/0.22 =37777
BV =63211
X4=ME/BV= 3852.82/63211 =0.06
X5 =215305/05711 =2.0367times
Z-Score
2003
Z = 0.0012*49.670+0.014*17.94+0.033*0.3453+0.006*2.75+0.0999*3.0565
=3.93
2004
Z =0.12*49.04+0.014*20.68+0.033*0.20+0.006*1.03+0.999*2.60
=3.49
2005
Z = 0.012*49.04+0.014*15.94+0.033*0.462+0.006*0.06+0.999*2.0367
=2.6887
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The Altman Z factor range of 1.81-2.99 represents the so-called zone of ignorance". It means
that the company range lies between 1.81 and 2.99 Z factor than it is very difficult to predict the
company whether it is in bankruptcy or not. If company lies below the 1.81 Z factor than
company is in a bankruptcy stage. If the company Z factor lies above the 3 that represents the
company is in expansion stage non failure stage. In the company at 2003 the Z score is 3.93 that
show the company is in good condition. In 2004 the company has 3.49 Z score that also
represent good condition of the company but it is below than previous. In the 2005 Z score is
2.68 that indicate the company moves slowly to bankruptcy stage. They need certain changes in
the company.
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2005
2006 (Projected)
2007 (Projected)
Net Sales
215,305.00
228,223.30
249,904.51
183,307.00
188,284.22
199,923.61
Gross Profit
31,998.00
39,939.08
49,980.90
18,569.00
18,257.86
18,742.84
Depreciation
2,244.00
2,665.00
2,006.00
Misc Expenses
6,297.00
3,993.91
3,123.81
27,110.00
24,916.77
23,872.64
EBIT
4,888.00
15,022.31
26,108.26
2,006.00
4,331.00
4,331.00
1,052.00
1,052.00
1,052.00
233.00
210.00
189.00
1,597.00
9,429.31
20,536.26
Tax @48%
766.56
4,526.07
9,857.40
Net Income
830.44
4,903.24
10,678.85
Dividend on Stock
207.61
Addition to RE
622.83
4903.24
10678.85
Interest on Mortgage
EBT
Financial Management
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Page 27
Net sales growth rate in 2006 by 6% based on 2005 year and 2007 net sales growth rate 9.5%
based on 2006 year sales, company maintain cost of goods sold in 2006 and 2007. Cost of goods
sold for 2005 is 85% in 2006, 82.5 % and in 2007, 80 % company want to maintain its COGS
lower with increase in sale. Project gross profit also increases in 2006 and 2007 by 17.5% and
20% with increase in sales and decrease in cost of goods sold. Company expected to reduce
administrative and selling expenses 9% in 2005, 8% in 2006 to almost 7.5% in 2007 and also
sufficient reduce in miscellaneous expenses 1.75% in 2006 and 1.25% in 2007. Sufficient
improvement lead to increase EBIT 15022.31 in 2006 and 23872.64 in 2007 it is good
improvement from 2005 EBIT 4888. Net income also increases in 2006 and 2007 and also
company maintain its dividend payment 25% in projected year.
Financial Management
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2005
2006 Projected
2007 Projected
Cash
4296
22791.4
26144.04
Accounts receivable
32293
20286.52
22213.73
Inventory
51324
33032.32
35074.32
Current assets
87913
78854.43
83432.14
25161
32173
33139
equipment
(7363)
(10028)
(12033)
Accumulated deprecation
17798
22145
21106
105711
98225.24
104538.14
20056
27068
27068
Account payable
21998
17594
18474
Accruals
8064
10231
12789
Current liabilities
50118
54894
58331
105118
10519
10519
Mortgage
2574
2314
2083
13092
12833
12602
Total liabilities
63211
67727
70933
Common stock
25596
25596
25596
Retained earnings
16904
3677.43
8009.14
Assets
Total assets
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Owners equity
42500
29273.43
33605.14
Total capital
105711
9822524
104538.14
The cash position of projected in 2006 and 2007 year is sufficient to maintain 5% of sales shows
the collection of cash in the company. Inventories and account receivable also maintain on
industry level. Current assets also increases which is good for the company. The increase in land
and building shows the purchase of land and building. Fixed assets position is also satisfactory in
the company. The overall total assets are increase in the company. It is good for the company.
Looking towards the Liabilities short term bank loans increase and remains same in 2007.The
accounts payable is decrease that shows the company pays the cash to suppliers and creditors.
The outstanding expense increase that shows the company have due expense to be paid. The
overall current liabilities are increase. The long term loan decrease that indicate the payments of
long term debt and remains same in 2007.The common stock remain the same that means the
company didnt issue further more shares in the company. The retain earnings also increase from
2005 t0 2007.It indicate that the company earn more profit. The owners equity also increases.
The total liabilities also increase in the company. The overall financial position is good in the
company. The company has a chance to take benefit from the future.
Financial Management
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Page 30
2005
2006
2007
Industr
(Projected (Projected y
)
)
Average
Current Ratio
1.75
1.36
1.43
2.50
Quick Ratio
0.73
0.76
0.83
1.00
59.80
69.82
1.49
2.69
4.69
7.70
3.57
5.70
5.70
5.70
4.20
6.91
7.13
7.00
12.10
10.31
2.04
2.35
54.00
32.00
0.39
2.15
14.86
17.50
20.00
18.00
0.79
5.05
10.22
8.80
1.95
16.75
31.78
17.50
Leverage Ratios
67.85
50.00
Assets Management
Ratios
11.84
12.00
2.39
32.00
3.00
32.00
Profitability Ratios
Financial Management
4.27
Group 2
2.90
Page 31
The current ratio of the company for the year 2005 was 1.75 and the current ratio of industry
average in the year 2007 was 2.50. It means that the company is being more capable to pay its
short term obligation. Quick ratio is also seems as increasing from 0.63 to 1.00. That means, the
cash and cash equivalent was increasing in the company, the liquidity capacity is increased. Debt
ratio seems to be reduced from 59.8 to 50, time interest earned is increasing. Inventory turnover
cost is increasing. Fixed assets when set at once, it remains for the various years. So, the fixed
assets turnover is reducing.
Talking about profitability ratio, the profit margin, gross profit margin, return on total assets,
return on total equity, these all are in increasing way. That means, the companys profit is
increasing year by year the return we get from the shareholders investment and from the total
assets is increasing. By analyzing this ratio, it is concluded that the situation of the company is in
enhanced situation. The company is in the growth condition. The capacity of company, its market
occupancy is increasing by the year. Therefore, it is concluded that the company is in better
situation.
Financial Management
Group 2
Page 32
Particular
2005
2006 (Revised)
2007 (Projected)
Net Sales
215,305.00
228,223.30
249,904.51
183,307.00
188,284.22
199,923.61
Gross Profit
31,998.00
39,939.08
49,980.90
18,569.00
18,257.86
18,742.84
Depreciation
2,244.00
2,665.00
2,006.00
Misc Expenses
6,297.00
3,993.91
3,123.81
27,110.00
24,916.77
23,872.64
EBIT
4,888.00
15,022.31
26,108.26
2,006.00
2165.00
1,052.00
1,052.00
1,052.00
233.00
210.00
189.00
Interest on Mortgage
EBT
1,597.00
11595.31
24,867.26
Tax @48%
766.56
65565.75
11,936.28
Net Income
830.44
6099.56
12,930.97
Dividend on Stock
207.61
Addition to RE
622.83
Financial Management
Group 2
6099.56
12,930.97
Page 33
Revised pro forma income statement show the net profit changes of the company in 2006 and
2007 after paying short term loan. Sales, cost of goods sold, gross profit, selling and
administrative expenses, depreciation, miscellaneous expenses no changes from projected
income statement. Company paid short term loan in earlier in 2006 so company pail only 2165
and there is no interest on short term loan in 2007. Comparing to project income statement there
no change in EBIT but in revised income statement income of the company is lower. After
paying short term Loan Company failed to paid dividend to its shareholder because of in
sufficient cash balance. Retained earnings also decline in revised income statement compare to
projected balance sheet.
Financial Management
Group 2
Page 34
2005
2006 (Revised)
2007 (Revised)
Cash
4296
3997.92
Accounts receivable
32293
20286.52
22213.73
Inventory
51324
33032.32
35074.32
Current assets
87913
53318.84
61285.97
25161
32173
33139
(7363)
(10028)
(12033)
Accumulated deprecation
17798
22145
21105
105711
75463.84
82391.97
20056
Account payable
21998
17594
18474
Accruals
8064
13411.28
12789
Current liabilities
50118
31005.28
31263
105118
10519
10519
Mortgage
2574
2314
2083
13092
12833
12602
Total liabilities
63211
43838.28
43865
Common stock
25596
25596
25596
Retained earnings
16904
6029.56
12931.97
Assets
Financial Management
Group 2
Page 35
Owners equity
42500
31625.56
38526.97
Total capital
105711
75463.84
82391.97
In revised year 2006 and 2007 company failed to paid dividend to its shareholders retained
earnings also lower compare to projected year 2006 and 2007. SRM also failed to maintain its
5% cash position. Company paid short term loan earlier in 2006 so company can't maintain the
cash position and also increase its accrual to make balance of assets and liabilities but in 2007
company maintain cash $3997 but it is also lower to 5% company standard.
Financial Management
Group 2
Page 36
2005
2006 (Revised)
2007 (Revised)
Industry
Average
Current Ratio
1.75
1.78
1.96
2.50
Quick Ratio
0.73
0.68
0.84
1.00
59.80
56.60
53.24
50.00
1.49
11.90
21.04
7.70
3.57
5.70
5.70
5.70
4.20
6.91
7.12
7.00
12.10
10.31
11.84
12.00
2.04
3.02
3.03
3.00
54.00
32.00
32.00
32.00
0.39
3.14
5.17
2.90
14.86
17.50
20.00
18.00
0.79
9.48
15.69
8.80
1.95
21.85
33.56
17.50
Leverage Ratios
Debt ratio (%)
Times Interest earned
Profitability Ratios
Profit Margin (%)
Financial Management
Group 2
Page 37
Current Ratio
Current Asset/Current Liabilities
Current ratio of revised (Table: 14) shows not good position of SRM in 2006 of 1.78 and 2007
of 1.96 than that of in projected (Table: 11). Current ratio in 2006 and 2007 is lower than of
industry average of 2.50.
Quick Ratio
(Cash + Marketable Securities + Trade Accounts Receivable) / Current Liabilities
Quick ratio in 2006 and 2007 revised of 0.68 and 0.84 respectively no different because of higher
volume of inventory. This show both revised years 2006 and 2007 quick ratios is less than
industry average of 1.00 and after paying short term loan no different in quick ratio.
LEVERAGE RATIOS
Debt Ratio
Total Liabilities / Total Assets
Debt ratio is in both years 2006 of 56.60% and 2007 of 53.24% revised slightly lower than
projected. This shows low risk at revised than projected. Comparing this ratio with industry
average of 50.00% SRM shows higher risky in term of debt financing in its investing activities.
Times interest earned ratio
(EBIT/Total Interest)
Times interest earned ratio in both year of revised 11.90 and 21.05 in 2006 and 2007 respectively
show stronger ability of SRM to make interest payment out of its EBIT than that of projected. In
2006 SRM would be paying interest for first half of the year so this ratio seems to be high and
than of industry average of 7.70. Then in 2007 firms ability to meets its current interest
increases to about 3 times of the industry average. This shows SRM strong ability to pay interest
of reaming debt.
Financial Management
Group 2
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Financial Management
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Financial Management
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Analyzing the projected financial statements, it seems that the company will improve its
financial positions if all the projections are materialized, if all the projections are materialized
company will surely grow its financial position reflected by financial statements. Considering the
above reason, the bank should grant and extend the existing loan. However the bank can use its
safeguarding tools to make its loan safe. Such as
a. Security
A financial instrument that represents: an ownership position in a publicly-traded
corporation (stock), a creditor relationship with governmental body or a corporation
(bond), or rights to ownership as represented by an option.
b. Mortgage
A debt instrument, secured by the collateral of specified real estate property, that the
borrower is obliged to pay back with a predetermined set of payments.
c. Guarantee
In general, a financial guarantee is a promise to take responsibility for another
company's financial obligation if that company cannot meet its obligation. The entity
assuming this responsibility is called the guarantor. It is non-cancellable indemnity bond
that is backed by an insurer in order to guarantee investors that principal and interest
payments will be made.
d. Insurance
A commercial contract agreeing to compensate one for loss in the event of specifically na
med or described risks.
Financial Management
Group 2
Page 42
Issue 7: Alternative
It will be intense choice for SRM to make if bank request quick reimbursement of two current
short and long terms loans. Its aggregate advance in 2005 is $27795. It would be smart thought
to offer some of its value as shares are exchanging at $1.02 in business sector. Book estimation
of value in 2005 is 38,636.72 however it has come to just $3570 in business sector along these
lines, it may not be best alternative. The choice left for the SRM Company will be to change over
money equal advantage for money and pay the credit as requested by the MCNB. As it is clear
that silver river manufacturing organization whose stock is exchanged over the counter is a huge
local maker of homestead and utility trailers, particular trained animals transporters and
manufactured home body was financially solid before 2003. Hence, the president of the
organization was ignoring the genuine circumstance of the organization. As indicated by the lack
report, which uncovered various significant issue in the money related status of silver river
manufacturing organization ,especially that of flow proportion, speedy and obligation proportion.
So as to maintain benefits and unrivaled business sector execution Mr. White forcefully
diminished costs to strengthen further deals. This SRM as well as, offered more good credit
terms and loose credit guidelines. Therefore, creation proceeded with unrestricted and
inventories began expanding. This action of Mr. White increased sales through the third quarter
of 2005, but inventories also increased steadily and particularly short-term credits and accounts
receivable grew up dramatically.
Consequently, on the off chance that if the bank withdraws the whole line of credit and requests
prompt reimbursement of the two current advances, SRM can receive taking after activities like:
Sale of assets:
In the event that all of above alternatives neglect to meet the credit reimbursement,
SRM can sell distinctive resources of the organization which can help to pay prompt
reimbursement of the advance .These advantages may incorporate vehicles, land,
ventures, market securities and so forth.
Financial Management
Group 2
Page 43
Minimizing the stock level means the increment of trade stream in for cold hard currency the
organization which offers distinct option for pay the credit. SRM has colossal measure of
stock of $46658.62. Indeed, even just half change of its stock can meet practically parcel of
bank credit.
Financial Management
Group 2
Page 44
8. Lesson Learnt
Examining the entire instance of Silver River Manufacturing Company, we now take in the
accompanying lessons as:
To comprehend the center reasons for quality and shortcoming of the
organization.
To have the capacity to investigate the organization's money related condition in
view of various types of proportions.
Market and economies gauge ought to be done examination every single
conceivable variable.
Just increment in deals, resources and benefit doesn't give the reasonable picture
about organization's execution.
Prices of merchandise must not be decreased to build the interest and piece of the
overall industry without doing fitting investigations.
Debt financing obviously give influence to organization however it ought to keep
up to certain extent, if obligation proportion surpasses past it have danger to
organization, Company can likewise turn chapter 11.
Over-confidence, thinking great times are constantly practically around the bend
may obfuscate the reasoning and may misdirect the organization if business
gauges turned out badly.
Sales development and high piece of the pie may not be the entire response to the
topic of maintained long-run gainfulness. This technique can just work when it is
conceivable to protect sensible overall revenue.
Sometime firm may need to change the old strategy and take solid choice that
may even incorporate chopping down expenses ending a portion of the staffs.
We additionally learn analyzing the financial report of the firm.
To have the capacity to see the diverse corner of the money related proclamations
of the organizations
Financial Management
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Page 45