Srm

Presentation on

Financial Aspects of Silver River Manufacturing

Prepared By:Diwakar Bist

General Background• SRM is a large regional producer of farm and utility trailers,

specialized lives stock carriers and mobile home chassis.

• SRM depends on farmers for about 45 to 50 percent of its sales.

• SRM is a major client of Marion County National Bank(MCNB).

• SRM products are based on latest technology and it holds several patent.

CASE• Recession seems to hit the nation’s farm economy

• Created problems for agricultural suppliers like SRM.

• Disastrous freezes for two straight winters devastated Florida’s citrus and vegetable industries.

• Caused drastic decline in demand for new grove trailers and citrus transport carriers hit SRM hard.

Cont…

•Very optimistic founder and President of SRM, Greg White seems to be worried and realize the situation that there was a chance that he could lose the company.

• He regrets for letting such situation to develop.

•The deficiency report, generated by the financial position of SRM company stimulated MCNB to take an action.

•Bank had a legal right to call for immediate repayment of loans.

Cont…• Inability to pay the bank within 10 days, could force the

company into bankruptcy.

• SRM had been a good client of MCNB for many years and had never missed the payment when it was due.

• Lesa Nix, former loan officer of MCNB realized that the bank examiner were very sensitive about SRM’s report.

• Nix looked upon the threat of loan repayment so as to undivide Gerg’s attention.

ISSUE 1

Particulars 2004 2005Sources of fundsNet income after taxesDepreciation Funds from operationsLong-term loanNet decrease in working capital Total sourcesApplication of fundsMortgage changeFixed assets changeDividends on stock Net increase in working capital Total uses

6,987.001,823.008,810.003,506.00

12,316.00

295.002,574.001,747.007,702.0012,316.00

830.002,244.003,074.000.000472.003,546.00

287.003,051.00208.000.00003,546.00

Analysis of changes in working CapitalIncrease (decrease) in current assetsCash changeAR changeINV change CA changeIncrease (decrease) in current liabilitiesNP changeAP changeACC change CL changeNet increase (decrease) in working capital

(1,260.00)1,500.0015,505.0015,745.00

2,104.004,117.001,823.008,044.007,702.00

(107.00)11,985.0014,992.0026,870.00

14,446.0010,441.002,454.0027,341.00(472.00)

Table 6: Silver River Manufacturing Company Statement of Changes in Financial Position Year Ended December 31(thousands of dollars)

Particulars 2003 2004 2005 Industry average

REMARKS

Liquidity ratiosCurrent ratioQuick ratioLeverage ratiosDebt ratio (%)Times interest earnedAsset management ratiosInventory turnover (Cost)aInventory turnover (Selling)bFixed asset turnoverTotal asset turnoverAverage collection periodProfitability ratiosProfit margin (%)Gross profit margin (%)Return on total assetsReturn on owners’ equityPotential failure indicatorAltman Z factor

3.071.66

40.4615.89

7.149.0311.583.0636.00

5.5020.8916.8328.26

3.06

2.681.08

46.337.97

4.555.5911.952.6035.99

3.4418.708.9516.68

2.64

1.750.73

59.7961.49

3.574.1912.0972.0453.99

0.38614.860.7861.95

2.04

2.501.00

50.007.70

5.707.0012.003.0032.00

2.9018.008.8017.50

1.81/2.99

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

Ratio Analysis:LIQUIDITY RATIO

Current Ratio

2003 2004 20050

0.5

1

1.5

2

2.5

3

3.5

SRM company industry average

Quick Ratio

2002.5 2003 2003.5 2004 2004.5 2005 2005.50

0.20.40.60.8

11.21.41.61.8

SRM company industry average

LEVERAGE RATIO

Debt Ratio

2002.5 2003 2003.5 2004 2004.5 2005 2005.50

10

20

30

40

50

60

70

SRM company Industry average

Times Interest Earned

2002.5 2003 2003.5 2004 2004.5 2005 2005.502468

1012141618


ASSETS MANAGEMENT RATIO

Inventory Turnover Ratio (cost)

2002.5 2003 2003.5 2004 2004.5 2005 2005.50

1

2

3

4

5

6

7

8


Inventory Turnover Ratio (sales)

2002.5 2003 2003.5 2004 2004.5 2005 2005.50123456789

10



Fixed Assets Turnover Ratio

2002 2003 2004 2005 200611.311.411.511.611.711.811.9

1212.112.2


Total Assets Turnover Ratio

2002.5 2003 2003.5 2004 2004.5 2005 2005.50

0.5

1

1.5

2

2.5

3

3.5

SRM industry Industry

2002.5 2003 2003.5 2004 2004.5 2005 2005.50

10

20

30

40

50

60

SRM company Industry

Average Collection Period

PROFITABLITY RATIO

Profit Margin (%)

2002.5 2003 2003.5 2004 2004.5 2005 2005.50

1

2

3

4

5

6


Gross Profit Margin (%)

2002.5 2003 2003.5 2004 2004.5 2005 2005.50

5

10

15

20

25

SRM company Indusry

PROFITABLITY RATIO

Return on Total Assets

2002.5 2003 2003.5 2004 2004.5 2005 2005.50

2

4

6

8

10

12

14

16

18


Return on Owner’s Equity

2002.5 2003 2003.5 2004 2004.5 2005 2005.50

5

10

15

20

25

30

SRM company Indusry

ISSUE 2

Du Pont System Analysis

2003 2004 20050

5

10

15

20

25

30

ROE

ROE

Particulars Return On Equity (R.O.E)

= Net Profit Margin

× Asset Turnover

× Equity Multiplier

2003 28.24% 0.055 3.0565 1.67972004 16.68% 0.0343 2.603 1.8632005 1.954% 0.004 2.037 2.487Industry Average

17.5% 2.90 3.00 2.00

STRENGTH

• Fixed assets turnover ratio is good i.e, 12.097 in 2005 as compared to industry

average. i.e, 12.00.

• Z-Altman factor in 2005 is 2.043 which lies in gray zone .

Weakness• SRM z score for 2005 is 2.043 which indicates that the company is in “gray Zone”

which means the company have chance of failure.

• Liquidity ratio:

• Leverage ratio

• Asset Management ratio

• Profitability ratio

Altman Z factors of SRM:

2003 2004 20050

0.5

1

1.5

2

2.5

3

3.5

Z- FACTOR

Z- FACTOR

STRENGTH

• Fixed assets turnover ratio is good i.e, 12.097 in 2005 as compared to industry average. i.e,

12.00.

• Z-Altman factor in 2005 is 2.043 which lies in gray zone which is not bad and can be

improved.

Weakness• SRM z score for 2005 is 2.043 which indicates that the company is in “gray Zone” which

means the company have chance of failure.

• Decreasing liquidity ratios

• High leverage

• Lacks in asset management.

• lacks Operational effeciency

ISSUE 3

Issue 3: Tables 9 & 10: Projection of financial statements 2006 & 2007 &

analysisGiven,Tax rate for both year= 48%Silver River Manufacturing Company pays no dividends during the yearIn these calculations Cash is the residual balancing figure For 2006 The sales growth rate= 6.00%The cost of goods sold= 82.5% of salesThe Administrative and selling expenses= 8% of salesThe Miscellaneous expenses= 1.75% of sales For 2007 The sales growth rate= 9.50%The cost of goods sold= 80% of salesThe Administrative and selling expenses= 7.5% of salesThe Miscellaneous expenses= 1.25% of sales

Particulars 2005 2006 Projected

2007 Projected

Net salesCost of goods soldGross profitAdministrative and selling expensesDepreciationMiscellaneous expenses Total operating expenses EBITInterest on short term loanInterest on long-term loansInterest on mortgage Net income before taxTaxes Net incomeDividends on stockAdditions to retained earnings

215,305183,30731,99818,5692,2446,29727,1104,8882,0061,0522331,597767831208623

22822318828439939182582665399424,91715022433110522109429452649030.0004903

249904199923499811874320063124238732610843311052189205369857106790.00010679

Table 9: Silver River Manufacturing Company Pro forma Income Statements (Projected) Worksheet for the year End 2007 (Thousands of Dollars)

Particulars 2005 2006 Projected 2007 Projected

AssetsCashAccounts receivableInventoryCurrent assetsLand, Building, plant and equipmentAccumulated depreciationNet fixed assets

429632293513248791325161(7363)17798

3966720286330329298532173(10028)22145

49529222133507410681633139(10939)22199

Total assets 105711 115130 129015

Liabilities and equitiesShort term bank loansAccount payableAccrualsCurrent liabilitiesLong term bank loansMortgageLong term debtTotal LiabilitiesCommon stockRetained earningsOwners equity

20056219988064501181051925741309263211255961690442500

270681759410231548941051923141283367727255962180747403

270681847412789583311051920831260270933255963248658082

Total Capital 105711 115130 129015

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

Worksheet for Year End 2007 (Thousands of Dollars)

INTERPRETATION• In 2006, the company has total cash balance of 39667 thousands and

during the same year the short-term bank loan to be retired is 27068• = $(39667 – 27068)• = $12599• 5% of sales. is maintain by the company• Minimum cash balance = $ (228223* 0.05)• = $ 11411.15

• From the calculation we can see that the company is able to maintain the minimum cash balance. Hence, it has enough cash balance to retire the short-term bank loans i.e. SRM will be able to retire its short term bank loan if the prediction made were materialized.

ISSUE 4

Particulars Formula 2005 2006 Projected

2007 Projected

Industry Average

REMARKS

Liquidity ratiosCurrent ratioQuick ratioLeverage ratiosDebt ratio (%)Time interest earnedAsset management ratiosInventory turnover (cost)Inventory turnover (Selling)Fixed asset turnover

Total asset turnoverAverage collection period

Profitability ratiosProfit margin (%)Gross profit margin (%)Return on total assetsReturn on owners equity

CA/CL(CA-Inventory)/CLTotal debt/TAEBIT/Interest chargeCOGS/InventorySales/InventorySales/Net fixed assetsSales/Total assetsReceivables/(annual sales/360)

Net income/SalesGrossIncome/SalesNet Income/TANet Income/equity

1.750.73

59.801.48

3.574.1912.10

2.0454.00

0.3814.860.781.95

1.691.09

59.002.68

5.706.910.3

1.9832.00

2.1517.54.2610.34

1.831.23

55.004.68

5.707.111.26

1.9432.00

4.2720.008.218.38

2.501.00

50.007.70

5.707.0012.00

3.0032.00

2.9018.008.8017.50

Poor Ok

Poor Poor

Poor Poor Poor

Poor Ok

Ok Ok Poor Ok

Table 11: Silver River Manufacturing Company Ratio Analysis Year Ended December 31, 2007 (Projected)

LIQUIDITY RATIO

Current Ratio

2005 2006 20070

0.5

1

1.5

2

2.5

3

SRM Company Industry Average

Quick Ratio

2005 2006 20070

0.2

0.4

0.6

0.8

1

1.2

1.4


LEVERAGE RATIO

Debt Ratio

2005 2006 200744464850525456586062


Times Interest Earned

2005 2006 20070

2

4

6

8

10

12



Inventory Turnover Ratio (cost)

2005 2006 20070

1

2

3

4

5

6


Inventory Turnover Ratio (sales)

2005 2006 2007012345678



Fixed Assets Turnover Ratio

2005 2006 20079

9.5

10

10.5

11

11.5

12

12.5


Total Assets Turnover Ratio

2005 2006 20070

0.5

1

1.5

2

2.5

3

3.5


Average Collection Period

2005 2006 20070

10

20

30

40

50

60


PROFITABLITY RATIO

Profit Margin (%)

2005 2006 20070

0.51

1.52

2.53

3.54

4.5


Gross Profit Margin (%)

2005 2006 20070

5

10

15

20

25


PROFITABLITY RATIO

Return on Total Assets

2005 2006 20070123456789

10


Return on Owner’s Equity

2005 2006 200702468

101214161820


ISSUE 5

ISSUE 5

• If company pays all the short term debts towards the end of first half will the company be able to pay regular dividends and maintain minimum cash balance.

Table 13: Silver River Manufacturing Company

Pro Forma Balance Sheets (Revised)

Worksheet for Year End 2007 (Thousands of Dollars)

Particulars 2005 2006 Revised 2007 RevisedAssetsCash 4296 12217 22265Accounts Receivable 32293 20286 22213Inventory 51324 33032 35074 Current Assets 87913 65535 79552Land, Buildings, Plant and Equipment 25161 32173 33139Accumulated Depreciation (7363) (10028) (12033) Net Fixed Assets 17798 22145 21105Total Assets 105711 87680 100657Liabilities and EquitiesShort-term bank loans 20056 0.00 0.00Account payable 21998 17594 18474Accruals 8064 10231 12789 Current liabilities 50118 27826 31263Long-term bank loans 10519 10519 10519Mortgage 2574 2314 2083 Long-term debt 13092 12833 12602 Total liabilities 63211 40658 43865Common stock 25596 25596 25596Retained earnings 16904 21426 31196 Owners' equity 42500 47022 56792Total Capital 105711 87680 100657

Table 14: Silver River Manufacturing Company

Ratio Analysis Year Ended December 31 (Revised)

Particulars 2005 2006 Revised 2007 Revised Industry average

Liquidity Ratios

Current ratio 1.75 2.35 2.54 2.50

Quick Ratio 0.73 1.17 1.04 1.00

Leverage Ratios

Debt ratio (%) 60 46 43.57 50.00

Times interest earned 1.48 4.38 21.19 7.70

Asset Management Ratios

Inventory turnover (Cost) 3.57 5.70 5.70 5.70

Inventory turnover (Selling) 4.19 6.9 7.12 7.00

Fixed asset turnover 12.1 10.3 11.84 12.00

Total asset turnover 2.04 2.6 2.48 3.00

Average collection period 54 32 32 32.00

ProfitabilityRatios

Profit margin (%) 0.39 2.64 5.21 2.90

Gross profit margin (%) 14.86 17.5 20 18.00

Return on total assets 0.78 6.87 12.94 8.80

Return on owners' equity 1.95 12.82 22.94 17.50

INTERPRETATION• SRM after paying the short term bank loan and making the

distribution of regular dividend in 2006 cash balance will be 5.35% of the sales and in year 2007 it will be 8.91% of sales.

• That is company will be able to maintain minimum cash balance after paying regular dividend and short term bank loan.

• All liquidity ,leverage, Assets management and profitability ratios are becoming better after implication of decisions.(i.e. Loan repayment and dividend distribution)

ISSUE 6

On the basis of our analyses company's forecasted favourable future market growth.

Demanding immediate repayment won’t be in the best interest for both the company and the bank.

The bank should extend the existing short and long term loans without granting the additional loan.

Analysis of following ratio shows that option B is better

Debt ratio-It determines the degree of company relying on outside fund.•

2005 2006 2007

59.8 46.37 43.58

• Times Interest Earned ratio• It is the measure of the company’s ability to

make interest payments on time.

• Current Ratio:•It shows how much of current assets it has to pay the current liabilities.

2005 2006 2007 Industry Avg1.48 times 4.38 times 21.18 times 7.7 times

2005 2006 2007 Industry Avg

1.75 2.35 2.54 2.50

• Quick Ratio• The company ability to meet the short term

debts without having to sell off receivables

Profit Margin• It shows how much profit the firm is earning

to know that it can pay the short term and long term loan easily or not.

2005 2006 2007 Industry Avg0.73 1.16 1.42 1

2005 2006 2007 Industry Avg

0.39 2.64 5.21 2.90

The Bank should Protect Itself using following measures

MortgageGuaranteeLoan Covenants

• Restriction on Disposal of Certain Assets• Restriction in payment of dividend• Restriction in further purchase and sale of assets.• Limitation on Use of The Funds Loaned.

Monitoring Insurance

ISSUE 7

ALTERNATIVES OPEN TO SRM..

• Converting the cash equivalent assets into cash which includes:

• Collecting account receivable as much as possible.• Minimize Inventory by selling as much as posssible.• Delay Accounts Payable Period:• Minimum cash balance policy:• Selling/Issue of Common Stock:• Hold back dividend Payment• Sale of Assets.

LESSON LEARNT..• How to analyze the strengths and weakness of the

company.

• How to analyze and make decision on the basis of financial ratios.

• How to analyze a firm will fail or likely to bankrupt.

• Importance of maintaining the liquidity.

• How to look at the different aspects of financial statements.

Economy & Finance

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