Silver River Management Case Study

A Case Study
On
Silver River Company
MBA, 11th Batch. Sec A
Group 4
Submitted to: Submitted by:
Prof. Dr. Radhe Shyam Pradhan. - Mohan KC
Faculty Member of Financial Management. - Nikita Khanal
- Nisha Joshi
- Pooja Neupane
- Pooja Pathak
- Prabhukar Luitel
- Pranita Rai

Introduction
Silver River Manufacturing Company (SRM) is a large regional producer of
farm and utility trailers, specialized livestock carriers and mobile home chassis owned
by Greg White It depends on farmers for roughly 45 to 50 percent of its total sales. Lesa
Nix was a vice president of the Marion Country National Bank and also a good friend
of Greg White. The event led to the telephone conversation was the filing of a
deficiency report, generated by the banks computerized analysis system, which alerted
the Senior loan Committee to the deteriorating to financial position of Silver River
Manufacturing Company. The bank has to calculate key ratios for each customers,
charts trends and compare the calculated ratios with industry average. If any ratio is
significantly worse than the industry average it reflects that it fails to meet contractual
requirements.
But SRM current, quick and debt ratios in 2005 seems that it doesn’t meet contractual
limits of 2.0, 1.0 and 55% respectively. The long and short terms loans should be repaid
within 10 days if not the bank can take legal right to force the company into bankruptcy.
SRM at past had never missed a payment when it was due so, it had been a good client
of MCNBfor many years. Lesa Nix who looked upon the threat of accelerating the loan
repayment primarily as a mean to get Greg White’s undivided attention and to force
him to think about corrective actions that must be taken once to reverse the deterioration
and to correct SRM’s near-term problem.
In 2000 the nations farm economy had been plagued that caused recession. The
total sales of the farmer decreases from roughly 45% to 50%. It creates problem for
Silver River Manufacturing Company. On the top of this, disastrous freezes for two
straight winters had devastated Florida’s citrus and vegetable industries, transport
carriers had hit SRM particularly hard. The products manufactured by SRM are not
subject to technological obsolesces or to deterioration and in those instances where
technology is to be considered, SRM holds several patents with which it can partially
offset some of the risk. SRM had been a good client of Marion County national Bank

(MCNB) for many years, had never missed a payment when it was due, and had a
reputation of unquestioned integrity in its business dealings. More than 85% of SRM’s
sales come from the South eastern part of the United States.
In the decade prior to 2003, SRM had experienced high and relatively steady
growth in sales, assets and profits. Toward the end of 2003, the demand for new field
trailers in the citrus and vegetable industries started to fall off. To maintain the
previously high growth of sales and to reduce the ever-expanding inventory, SRM not
only reduced prices, but also, as part of an “integrated market penetration plan” offered
more favorable credit terms and relaxed credit standards.
Hence, to finance these increase in assets, SRM turned to Marion Country
National Bank, (MCNB) for long term loan in 2004 and increase in its short term credit
loan in both 2004 and 2005. MCNB had been a major banker of SRM for a long time.
Even this was insufficient to cover the aggressive expansion on the asset side.
Consequently, Greg White who always made prompt payments, started to delay
payments. This resulted substantial increase in accounts payable and other short term
loans. Technically, the bank had a legal right to call for immediate repayment of both
long and short-term loans, and, if they were not repaid within ten days, could force the
company into bankruptcy.
Despite such adverse conditions Nix considered the company to have good long
run prospects, assuming, of course that management reacted immediately and
appropriately to the current situation. Hence, Nix looked upon the threat of accelerating
the loan repayment primarily as a means to get Greg White’s undivided attention and
to force him to think about corrective actions that must be taken at once to reverse the
deterioration and to correct SRM’s near-term problems. Even though she hoped to
avoid calling the loans if at all possible because that action would back SRM into a
corner from which it might not be able to emerge intact, Nix realized that the bank’s
examiners, due to the recent spate of bank failures, were very sensitive to the issue of
problem loans. SRM’s Altman Z factor (2.88) for 2005 was below 2.99 which indicated
that SRM was likely to get bankrupt in two years. Because of this deficiency, MCNB
was under increased pressure from the regulators to reclassify SRM’s loan as ‘problem
category’ and take whatever steps needed to collect the money due and reduce the
bank’s exposure as quickly as practicable. In order to avoid reclassification, SRM

required strong and convincing evidence to prove that its problems were temporary in
nature and it had good chance of reversing the trend.
The current financial problems were not the only problem Mr White faced. He
had recently signed a contract for a plant expansion that would require another
$70,125,000 of the capital during the first quarter of 2006. He had planned to obtain
this money by a short term loan from MCNB to be repaid from the profit generated in
the first quarter of 2006. He believed that new facilities would enhance the production
capabilities in a very lucrative area of custom horse van.
Regarding the financial data provided in the case and the projected income
statement and balance sheet, we have to analyze whether SRM is eligible to obtain the
bank loan. Now, the question is whether the bank should extend the existing short and
long-term loans or should rather demand immediate repayment of both existing loans.
Also we have to propose alternatives available to SRM if the bank were to decide to
withdraw the entire line of credit and to demand immediate repayment of the two
existing loans.
Statement of Problems
Silver River Manufacturing Company (SRM) is a large regional producer of
farm and utility trailers, specialized livestock carriers and mobile home chassis owned
by Greg White. The recession that has been plaguing the nation farm economy at least
since the start of the 2005 had caused severe, though mostly temporary; problems for
agricultural suppliers like SRM who depended on farmer for roughly 45-50% of total
sales.
SRM has been a good client of MCNB for many years but SRM could not repay
the loan. Current, quick and debt ratio of 2005 failed to meet the contractual limits of
2.0, 1.0, 55% respectively. Silver River Manufacturing Company facing the problems
of sales decreasing and losing market share price. It leads the company in to the
bankruptcy position. The financial position of the company is deteriorating. The
financial report of the company are representing deficit in 2005. The company needs
some more investment to overcome these problems occurs due to the losses in the

business. For the loan purpose, the MCNB requires quarterly financial statements from
the SRM.
i) Is the financial position of Silver River Manufacturing Company (SRM) has
improved as compare with the previous year?
ii) How DuPont Analysis present financial health of Silver River Manufacturing
Company (SRM)?
iii) What are the challenging issues of Silver River Manufacturing Company
(SRM) in industry?
Data Presentation & Analysis of capital market
Question 1:
(a) Prepare a statement if changes in financial position for 2005 (sources and Uses
of funds statement) or complete table 6.
Table 1:
Silver River Manufacturing Company
Statement of Changes in Financial Position Year Ended December 31 (Thousands
of Dollars)
Particulars 2004 2005
Sources of funds
Net income after taxes 6987 831
Depreciation 1823 2244
Funds from operation 8810 3075

Long term loan 3506 0
Net decrease in working capital 471
Total sources 12316 3546
Application of funds
Mortgage change 295 287
Fixed assets change 2574 3051
Dividends on stock 1747 208
Net increase in working capital 7702 0
Total uses 12316 3546
Analysis of changes in working capital
Increase (decrease) in current assets
Cash change (1260) (107)
AR change 1501 11985
INV change 15505 14992
CA change 15745 26870
Increase(decrease) in current liabilities
AP change 2104 10441
NP change 4116 14446
ACC change 1823 2454

CL change 8043 27341
Net increase(decrease) in working capital 7702 (471)
(b) Calculate SRM’s Key financial ratios for 2005 and compare them with those of
2003, 20041 industry average and contract requirement or complete table 7.
Table 2:
Ratio Analysis Year Ended December 31
Particulars 2003 2004 2005
Industry
Average
Liquidity ratios
Current ratio (Times) 3.07 2.68 1.75 2.50
Quick ratio (Times) 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
(Times)
Asset management
ratios
Inventory turnover(cost)
(Times) 7.14 4.55 3.57 5.70

Inventory
turnover(selling)(Times) 9.03 5.59 4.19 7.00
Fixed assets
turnover(Times) 11.58 11.95 12.10 12.00
Total asset
turnover(Times) 3.06 2.60 2.04 3.00
Average collection
period (Days) 36.00 35.99 54 32.00
Profitability ratios
Profit margin(%) 5.50 3.44 0.39 2.90
Gross profit margin(%) 20.89 18.70 14.86 18.00
Return on total assets(%) 16.83 8.95 0.79 8.80
Return on owner's equity
(%) 28.26 16.68 1.95 17.50
Potential failure
indicator
Altman Z factor 3.06 2.62 2.09 1.81/2.99
Liquidity ratio:
Current ratio: In 2003 current ratio is 3.07 which is greater than industry average that
is 0.57. In 2004 current ratio is 2.68 which is satisfactory and in 2005, current ratio is

1.75 which is poor in comparison with industry average. We can see current ratio is in
decreasing trend this means company ability to pay short liabilities is gradually
decreasing from 2003 to 2005.
Quick ratio: In 2003 is 1.66 which is good in compare with industry average. In 2004
quick ratio is 1.08 that is satisfactory in comparison with industry average and in 2005
quick ratio is not good than industry average that is 0.73.
Leverage ratios:
Debt ratio: In 2003 debt ratio is 40.46% which is good in comparison with industry
average that is 50%. In 2004 debt ratio is 46.33% which is satisfactory in comparison
with industry average but in 2005 debt ratio is risky that is 59.80% in comparison with
industry average.
0.
0.8
1.6
2.4
3.2
4.
2003 2004 2005 Industry Average
CA
Current Ratio
0.
0.43
0.85
1.28
1.7
2.13
2003 2004 2005 Industry average
Quick Ratio
Quick Ratio

Times interest earned: In 2003 time interest earned ratio is 15.89 which is good in
comparison with industry average. In 2004 time interest earned ratio is satisfactory that
is 7.97 in comparison with industry average. But in 2005 it is 1.49 which indicates the
poor level in comparison with industry average.
Asset management ratios:
Inventory turnover ratio (cost): In 2003 inventory turnover ratio (cost) is 7.14 which
is good in comparison with industry average. In 2004 inventory turnover ratio is 4.55
which is poor and in 2005 inventory turnover ratio is 3.57 which is very poor in
comparison with industry average.
Inventory turnover ratio (selling): In 2003 inventory turnover ratio (selling) is 9.03
which is good but in 2004 inventory turnover ratio (selling) is 5.59 which is poor and
in 2005 it is very poor that is 4.19 in comparison with industry average.
0.
15.
30.
45.
60.
75.
Debt Ratio
Debt Ratio
0.
4.
8.
12.
16.
20.
Times interest earned
Times interest earned
0.
2.
4.
6.
8.
Inventory Turnover (Cost)
Inventory Turnover (Cost)

Fixed asset turnover ratio: In 2003 fixed asset turnover is poor that is 11.58 and in
2004 fixed asset turnover ratio is in satisfactory level and in 2005 fixed asset turnover
ratio is good that is 12.10 in comparison with industry average.
Total asset turnover: In 2003 total asset turnover is 3.06 which is good but in 2004
total asset turnover is poor that is 2.60 and in 2005 total asset turnover ratio is low
which is 2.04 in comparison with industry average.
Average collection period: In 2003 average collection period is 36 which is not good
and again in 2004 average collection period is not good that is 53.9. And in 2005 it is
more risky that is 53.99 in comparison with industry average.
0.
2.5
5.
7.5
10.
Inventory Turnove (Selling)
Inventory Turnove (Selling)
11.2
11.4
11.6
11.7
11.9
12.1
12.3
Fixed Assets Turnover
Fixed Assets Turnover
0.
0.8
1.6
2.4
3.2
4.
Total Assets Turnover

Profitability ratios:
Profit margin: In 2003 profit margin is 5.50 which is good. In 2004 the profit margin
is 3.44 which is good but in 2005 the profit margin is 0.39 which is very poor in
Gross profit margin: In 2004, gross profit margin is 20.89% which is good and in
2004 the gross profit margin is 18.7% which is satisfactory in comparison to industry
average. And in 2005 it is 14.86% which is poor in comparison with industry average.
So this shows earning of company is negative.
Return on total assets: In 2003, return on total assets is 16.83 which is good and in
2004 return on assets is 8.95 which is satisfactory but in 2005 it is 0.79 which is very
poor in comparison with industry average.
0.
15.
30.
45.
60.
Average Collection Period
0.
1.5
3.
4.5
6.
Profit Margin
Profit Margin
0.
5.3
10.5
15.8
21.
26.3
Gross Profit Margin
Gross Profit Margin

Return on owner’s equity: In 2003 return on owner’s equity is 28.26 which is good
and in 2004 it is 16.68 which is in satisfactory level. But in 2005 the return on owner’s
equity is 1.95 which is poor in comparison with industry average.
Question 2.
Based on the case data and the results of your analysis in Question 1, what are the
SRM’s strengths and weaknesses? What are the causes thereof? (Use of the DU Pont
system and Altman Z factor would facilitate analysis and strengthen your answer.)
Solution:
Table 3
Silver River Manufacturing
DU Pont System:
0.
4.5
9.
13.5
18.
Return on total asset
0.
4.5
9.
13.5
18.

Particulars (ROE) = NPM × Assetturnover × EquityMultiplier
= NetIncome
Sales
× Sales
Total Assets
× Asset
Equity
2003 28.26 = 5.50 × 3.06 × 1.6796
2004 16.68 = 3.44 × 2.60 × 1.8634
2005 1.96 = 0.38 × 2.04 × 2.4873
Industry
Average
17.50 = 2.90 × 3.00 × 2.00
DU Pont System:
Du Pont system decomposes ROE into its component parts. This decomposition
helps us to find out exactly where the strengths and weaknesses lie. Management can
use this system to analyze ways of improving the firm’s performance.
If ROE goes up due to an increase in net profit margin or asset turnover, it is
beneficial for the company because it shows the operating efficiency and asset use
efficiency. But if the equity multiplier is the source, it means that company is taking
excessive debt and making it very risky.
Working Note:
Net profit Margin Net Income/ Sales Answer*100
2003 10355/188097 5.5
2004 6987/203124 3.44

2005 831/215305 .38
Total Asset Turnover Sales/total assets Answer
2003 188097/61539 3.06
2004 203124/78034 2.60
2005 215305/105711 2.04
Equity Multiplier Assets/Equity Answer
2003 61539/36637 1.6796
2004 78034/41877 1.8634
2005 105711/42500 2.4873
The industry average equity multiplier is unknown so we find the equity multiplier by
using the formula
Equity multiplier = ROE/ (NPM*TAT)
So we get,
Equity Multiplier = 17.50/(2.90*3) = 2.011 = 2 (Approx.)
Altman Z factor

The Z-Score Bankruptcy-Predictor combines several of the most significant variables
in a statistically derived combination.
Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 0.999X5
Where,
X1 = working capital / total assets (working capital is current assets less current
liabilities)
X2 = retained earnings / total assets
X3 = earnings before interest and taxes / total assets
X4 = market value of equity / book value of total debt (market value of equity includes
both preferred and common shares, and debt includes current and long-term liabilities)
X5 = sales / total assets
For 2003
Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 0.999X5
Altman Z factor = 1.2×Working capital + 1.4×Retained earnings + 3.3×EBIT
Total Assets Total Assets Total Assets
+ 0.6×Market value of equity + 0.999×Sales
Book Value of debt Total Assets
= 1.2 × 27785.93+ 1.4 × 10037.68+ 3.3 × 19318.73+
55944.31 55944.31 55944.31
0. 6 × 62254.29 + 0.999 × 170997.50
22637.63 55944.31
= 1.2 × 0.4967 + 1.4 × 0.1794 + 3.3 × 0.3453 + 0.6 × 2.75
+ 0.999 × 3.0566
= 6.69
SRM’s Altman Z Score for 2003 is 6.69.

Industry Average = 1.81 - 2.99
Working note:
We have, for the year 2003,
Working capital = Current assets – Current liabilities
= $ (41179.8113393.88) = $ 27785.93
Total Assets = $ 55944.31
Retained Earnings = $ 10037.68
EBIT = $ 19318.73
Market value of equity = $ 3499.39 x17.79 = 62254.29
Book value of debt (Total Liability) = $ 22637.63
Sales = $ 170997.50
For 2004
Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 0.999X5
= 1.2 × 34787.33+ 1.4 × 14801.45+ 3.3 × 13967.64+
70939.96 70939.96 70939.96
0. 6 × 34004.40 + 0.999 × 184658.25
32869.51 70939.96
= 1.2 × 0.4904 + 1.4 × 0.2086 + 3.3 × 0.1969 + 0.6 × 1.0345
+ 0.999 × 2.6030
= 4.75
SRM’s Altman Z Score = 4.75

Working note:
= $ (55493.34-20706.01) = $ 34787.33
EBIT = $ 13967.64
Market value of equity = $ 3509.23 x9.69 = 34004.40
Sales = $ 184658.25
For 2005
Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 0.999X5
= 1.2 × 34359.09 + 1.4 × 15367.72 + 3.3 × 4443.25 +
96101.01 96101.01 96101.01
0. 6 × 3500.54 + 0.999 × 195731.63
57464.29 96101.01
= 1.2 × 0.357531 + 1.4 × 0.159912 + 3.3 × 0.046235 + 0.6 × 0.060917
+ 0.999 × 2.036728
= 2.88
SRM’s Altman Z Score = 2.88

Working note:
= $ (79921.26 – 45562.17) = $ 3459.09
EBIT = $ 4443.25
Market value of equity = $ 3500.54
Sales = $ 195731.63
The Interpretation of Altman Z-Score:
Altman provides multivariate analysis of bankruptcy utilizing financial ratios. It allows
combining several financial ratios into a single predictive equation.
Z score below 1.8: High probability of failure and Z score above 3.0: High probability
of non failure.
Z score between 1.8 and 3.00: hard to predict with confidence whether the firm will or
will not fail. This range is also known as gray zone
Strengths
The strength of the organization are as below:
1. Favorable fixed asset turnover ratio: The fixed asset turnover ratio is
increasing in 2005. The rate at which the SRM is able to turn its fixed assets is
high. Since the fixed asset turnover ratio high, it tells us that the company has
used its fixed assets very effectively.
2. Altman Z score: SRM’s Altman Z score is declining from 2003 to 2005. As
we can seen at 2005 the Altman Z factor is 2.88, which is neither on the high
probability of failure nor on the high probability of non failure. Even though,
the factor is compatible with the industry average, it is not a good sign for the
company. SRM falls under gray zone. Since falling on the gray zone it should
be more careful about getting bankrupt
Weaknesses
1. Liquidity position: The economic downturn has inversely effect on SRM of
being Liquidity. We can see in table 7 of our case that both the ratios are
decreasing rapidly. Comparing with the industry average we see there is a
drastic decrease in current ration and quick ratio. SRM is less liquid that its
competitor.

2. Profitability ratios: Similar to the liquidity ratio, all the profitability ratios are
in declining from 2003 to 2005. The net profit margin has drastically reduced
from 5.50 to 0.39 and is less than the industry average. Comparing with the
industry average of 2.90, the SRM’s operating efficiency is very poor
considering the competitors in the market.
3. Asset management ratios: The major asset management ratios are showing
declining trend from 2003 to 2005. The Du Pont analysis also shows that the
asset turnover ratio has decreased from 3.06 in 2003 to 2.04 in 2005. The
industry average is 3. The assets have not been efficiently utilized to generate
sales.
4. Financial leverage: From our analysis we find that in 2005 Company has
59.80% debt ratio, it tells us that the company financed more than half of its
assets by borrowing. Comparing with industry average of 50.00, SRM is using
more debt to finance its assets than its competitors. The Du Pont analysis also
show that the equity multiplier is higher in 2005 as compared to 2003, 2004 and
industry average. This indicates that the company has high chances of being
bankrupt.
Question 3.
If the bank were to maintain the present credit lines and grant an additional $7,012,500
short-term loan at a 16 percent rate of interest effective from January 1, 2006, would
the company be able to retire all short-term loans existing on December 31, 2006?
(Assume that all of White’s plans and predictions concerning sales and expenses
materialize. In these calculations cash is the residual balancing figure, and SRM’s tax
rate is 48%. Assume that SRM pays no cash dividends during the year.) Complete tables
9 and 10 included as worksheets to facilitate analysis.
Table 4:
Silver River Manufacturing
Pro Forma Income Statements (Projected)
Worksheet for Year End 2007 (Thousands of Dollars)
Particulars 2005 2006 Projected 2007 Projected
Net sales 215305 228223.3 249904.5

Cost of goods sold 183307 188284.2 199923.6
Gross profit 31998 39939.1 49980.9
Administrative and selling 18569 18258 18742.84
Depreciation 2244 2665 2006
Miscellaneous expenses 6297 3994 3124
Total operating expenses 27110 24917 23872.84
EBIT 4888 15022.1 26108.06
Interest on short-term loans 2006 4331 4331
Interest on long-term loans 1052 1052 1052
Interest on mortgage 233 210 189
Net income before tax 1597 9429.1 20536.06
Taxes 767 4526 9857.3
Net income 831 4903.1 10679
Dividends on stock 208 0 0
Additions to retained earnings 623 4903.1 10679
Table 5
Pro Forma Balance sheets (Projected)
Particulars
2005
2006
Projected
2007
Projected

Assets
Cash 4296 39666 49528
Accounts receivable 32293 20287 22214
Inventory 51324 33032.32 35074.32
Current assets 87913 92985.1 106816
Land, buildings, plant, and equipment 25161 32173 33139
Accumulated Depreciation -7363 -10028 -10939
Net fixed assets 17798 22145 22199
Total assets 105711 115130.1 129015
Liabilities and equities
Short-term bank loans 20056 27068 27068
Accounts payable 21998 17594 18474
Accruals 8064 10231 12789
Current liabilities 50118 54894 58331
Long-term bank loans 10519 10519 10519
Mortgage 2574 2314 2083
Long-term debt 13092 12833 12602
Total liabilities 63211 67727 70933
Common stock 25596 25596 25596
Retained earnings 16904 21807 32486

Owners' equity 42500 47403.1 58082
Total capital 105711 115130.1 129015
Working notes of Table 4:
Particulars 2006 2007
Projected sales 215305 * 1.06 2,28,223.3
2,28,223.3*
1.095 2,49,904.5
Cost of goods sold
82.5% of
2,28,223.3 188284.2
80% of
2,49,904.5 1,99,923.6
Administrative and selling
expenses 8% of 2,28,223.3 182858
7.5% of
2,49,904.5 18742.8
Miscellaneous expenses
1.75% of
2,28,223.3 3,994
1.25% of
2,49,904.5 3124
Taxes 48% of 9,429.1 4,526 48% of 20536.1 9857.3
Working of Table 5:
1. Retained Earnings
For 2006: Retained earnings (2005) + Additions in 2006
16,904 + 4,903.1 = 21,807.1

For 2007: Retained earnings (2006) + Additions in 2007
21,807.1 + 10678.8 = 32485.9
2. Accounts Receivables
For 2006: Average collection period = Receivables / Sales per day
32 = Receivables / (228223.3 / 360)
Therefore, receivables = 20287
For 2007: Average collection period = Receivables / Sales per day
32 = Receivables / (249904.5 / 360)
Therefore, receivables = 22214
3. Inventory
For 2006: Inventory turnover = COGS / Inventory
5.7 = 188284.2 / Inventory
Therefore, inventory = 33032
For 2007: Inventory turnover = COGS / Inventory
5.7 = 199923.6 / Inventory
Therefore, inventory = 35074.3
Q&A, Is the firm able to retire the all short term loan existing on December 31,
2006.
At the end of 2006 the projected cash balance is 29666.1 (000”),
And the projected short term loan at 2006 would be 27068. The company is able to
retire all its loan since the cash balance is higher than the short term loan balance.

The remaining balance would be (29666.1-27068) = $2598.1
As we have paid off all the STL, we now have $2598.1 as cash balance. Now
Comparing the cash balance with our minimum standard of 5%, which is
(2,28,223.3*0.05) = $ 11411.2. We can see that the cash balance is above the minimum
cash balance by (11411.2-2598.1) = $8813, we can retire the Short term loan.
.
Question 4.
Compute projected financial ratios for 2006 and 2007 (or complete Table 11). Compare
these ratios with 2005 along with industry averages and analyze improvement or
deterioration in financial condition.
Table 6
Ratio Analysis Year Ended December 31,2007 (Projected)
Particulars 2005
2006
Projected
2007
Projected
Industry
average
Comm.
2006
Comm.
2007
Liquidity ratios
Current ratio 1.75 1.69 1.83 2.50 Poor Poor
Quick ratio 0.73 1.09 1.23 1.00 Good Good
Leverage ratios
Debt ratio (%) 59.80 58.83 54.98 50.00
Not
good
Not
good
Poor Poor

Asset management
ratios
Inventory turnover
(Cost)* 3.57 5.70 5.70 5.70
Ok Ok
Inventory turnover
(Selling)* 4.19 6.91 7.12 7.00
Ok Ok
Fixed asset turnover 12.10 10.31 11.26 12.00 Poor Poor
Total asset turnover 2.04 1.98 1.94 3.00 Poor Poor
Average collection
period 54 32.00 32.00 32.00
Ok Ok
Profitability ratios
Profit margin (%) 0.39 2.15 4.27 2.90 Poor Good
Gross profit margin
(%) 14.86 17.5 20 18.00 poor Good
Return on total assets 0.79 4.26 8.28 8.80
Poor Ok
Return on owners'
equity 1.96 10.34 18.39 17.50 poor Ok
Working Note

Particulars Formula 2006 2007
Current ratio
Current assets /
current liabilities 92985.1 / 54894 1.69
106815.9 /
58331 1.83
Quick ratio
(Current assets -
inventories) /
Current liabilities
(92985.1 - 33032)
/ 54894 1.09
(106815.9 –
35074.3) /
58331 1.24
Debt ratio
Total debt / Total
asset 67727 / 115130.1
58.83 70933 /
129014.9 54.98
Times interest
earned EBIT / Interest 15022.1 / 5,593 2.69
26108.1 /
5572 4.69
Inventory
turnover(cost) COGS / Inventory 188284.2 / 33032 5.7
199923.6 /
35074.3 5.7
Inventory
turnover(selling) Sales / Inventory 228223.3 / 33032 6.91
249904.5 /
35074.3 7.13
Fixed assets
turnover Sales / Fixed asset 228223.3 / 22145
10.3
1
249904.5 /
22199 11.84
Total asset turnover Sales / Total asset
228223.3 /
115130.1 1.98
249904.5 /
129014.9 1.94
Average collection
period
Receivables / Sales
per day
20287 / (228223.3
/ 360) 32
22214 /
(249904.5 /
360) 32
Profit margin (%)
(Net income / Sales)
* 100
(4903.1 /
228223.3)*100 2.15
(10678.8 /
249904.5)*10
0 4.27
Gross profit margin
(%)
(Gross profit / Sales)
* 100
(39939.1 /
228223.3)*100 17.5
(49980.9 /
249904.5)*10
0 20

Return on total
assets
(Net income / Total
asset) * 100
(4,903.1 /
115130.1)*100 4.26
(10678.8
/129014.9
)*100 8.28
Return on owner's
equity
(Net income / Total
equity) * 100
(4,903.1 /
47403.1)*100
10.3
4
(10678.8 /
58081.9)*100 18.39
Liquidity Ratio
Current Ratio: Current Ratio of 2005 is 1.75 times, 2006 is 1.69times, and 2007 is
1.83 these ratios are low in comparison to the industrial average of 2.50. Which shows
poor performance of company in terms of current ratio .This means company short term
assets like cash, receivable inventory are not readily available to pay its short term
liabilities like short-term loans, account payable and accruals.
.
Quick Ratio:Quick ratio of 2005 is 0.73, 2006 is 1.09and 2007 is 1.23 which shows
increasing trends in terms of quick ratios so it shows better performance in terms of
quick ratios except in 2005 which is low comparison to industrial average.
0.
0.63
1.25
1.88
2.5
2005 2006 2007 Industry
Current Ratio

.
Leverage Ratio
Debt Ratio: In 2005, debt ratio is 59.70%. Similarly in 2006 debt ratio is 58.83% and
in 2007 it is 55.98%. In comparison to industrial average of 50.00% shows low
performance. The company is considered to have taken more risk.
Times InterestEarnedRatio:In 2005 Times Interest Earned Ratio is 1.49 times
which rises to 2.69 in 2006. Whereas in 2007 it is 4.69 times. All these ratios are poor
compared to industry average of 7.70 times. Here company ability to interest is
questionable.
0.
0.65
1.3
1.95
2.6
2005 2006 2007 Industry
Average
QR
44.00%
46.75%
49.50%
52.25%
55.00%
57.75%
60.50%
2005 2006 2007 Industry
Debt Ratio

Asset Management Ratio
Inventory Turnover (Cost):Inventory Turnover ratio in year 2005 is 3.57 which
is poor compared to industry average. Whereas Inventory Turnover Ratio in 2006 is
5.70 and in 2007 is 5.70 which are satisfactory in comparison to industry average.
Inventory Turnover (Selling): In 2005 Inventory Turnover Ratio (selling) is
4.19 which are poor compared to industry average. However Inventory Turnover Ratio
in 2006 6.91as well as in 2007 is 7.12 which is very satisfactory.
0.
2.
4.
6.
8.
2005 2006 2007 Industry
Times Int Earned
0.
6.
12.
18.
24.
2005 2006 2007 industry
inventory turnover (cost)
0.
2.
4.
6.
8.
2005 2006 2007 Industry Avrg
Inventory Turnover (Selling)

Fixed Assets Turnover:In 2005, fixed assets turnover ratio is satisfactory at 12.10
times. In contrary in 2006 fixed assets turnover ratio is 10.31 which is poor in
comparison to industry average. Whereas in 2007 fixed asset turnover ratio is 11.26
which not so satisfactory. We can say that company is not able to manage assets in
significant manner.
TotalAsset Turnover Ratio:In 2005, Total Asset Turnover is 2.04 times which
is poor compared to industry average. Whereas in 2006 and 2007, it is 1.98 and 1.94
which is also poor.
9.
9.75
10.5
11.25
12.
12.75
2005 2006 2007 Industry Avg
Fixed Asset Turnover
0.
0.75
1.5
2.25
3.
2005 2006 2007 Industry Avg

Average Collection Period: In 2005, Average collection period is 54days which
is poor compared to industry average. Whereas in both 2006 and 2007, it is 32 which
is very satisfactory.
Profitability Ratio
Profit Margin: In 2005, Profit Margin is very poor at 0.39 % compared to Industry
Average. However in 2006 it increases to 2.15% which can be deemed to be
satisfactory. Whereas in 2007 it increase to 4.27% which is higher in comparison to
Industry average of 2.90%. It shows earning of company is increasing and positive.
Gross Profit Margin: Gross Profit Margin is.0.15% in 2005 which is very poor
compared to Industry Average. However it increases to 17.15% in 2006. Similarly it
increases to 20% in 2007 which is very good in comparison to Industry Average.
0
15
30
45
60
2005 2006 2007 industry
0.
1.25
2.5
3.75
5.
2005 2006 2007 industry
profit margin

Return on total Assets: In 2005, Return on Total Assets is very poor at 0.78%.
Similarly in 2006 it is again very poor at 4.26%. However it is 8.28% in 2007 which
is poor in comparison to Industry Average.
Return on Owner’s Equity: In 2005, Return on Owner’s equity is 1.96% which
is very poor compare to Industry Average. However it increases to 10.34% in 2006.
Similarly it increases to 18.39% which is good compared to Industry average.
Question 5
0.
5.
10.
15.
20.
2005 2006 2007 industry
gross profit margin
0.
2.25
4.5
6.75
9.
2005 2006 2007 industry
retun on total asset
0.
5.
10.
15.
20.
2005 2006 2007 industry
return on owners equity

If all short-term bank loans are repaid towards the end of the first half of 2006, do you
think that company is still able to pay regular dividends and maintain minimum cash
balance? Revise the tables 9, 10, 11 (or complete the tables 12, 13 and 14). Do you
find any situations developing that may indicate poor financial policy? What should
be the impact of such situations on the ratios for the company, and are such impacts
necessarily either good or bad? Why?
Table 7
Pro Forma Income Statements (Revised)
Particulars 2005 2006 Revised 2007 Revised
Net Sales 215305 228223 249904
Cost of Goods Sold 183307 188284 199923
Gross Profit 31998 39939 49981
Administrative and Selling 18569 18258 18743
Depreciation 2244 2665 2006
Miscellaneous expenses 6297 3994 3124
Total operating expenses 27110 24917 23873
EBIT 4888 15022 26108
Interest on short-term loans 2006 2165 0
Interest on long-term loans 1052 1052 1052

Interest on mortgage 233 210 189
Net income before tax 1597 11595 24867
Taxes 767 5566 11936
Net income 831 6029 12931
Dividends on stock 208 1507 3233
Additions to retained earnings 623 4522 9698
Table 8
Pro Forma Balance Sheets (Revised)
Particulars 2005
2006
Revised 2007 Revised
Assets
Cash 4296 12217 22192
Accounts Receivable 32293 20286 22214
Inventory 51324 33032 35074
Current Assets 87913 65535 79480
Land, Buildings, Plant and
Equipment 25161 32173 33139
Accumulated Depreciation (7363) (10028) (12033)

Net Fixed Assets 17798 22145 21105
Total Assets 105711 87680 100585
Liabilities and Equities
Short-term bank loans 20056 0 0
Account payable 21998 17594 18474
Accruals 8064 10231 12789
Current liabilities 50118 27826 31263
Long-term bank loans 10519 10519 10519
Mortgage 2574 2314 2083
Long-term debt 13092 12833 12602
Total liabilities 63211 40658 40865
Common stock 25596 25596 25596
Retained earnings 16904 21426 31124
Owners' equity 42500 47022 56720
Total Capital 105711 87680 100585
Table 9
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 2.5
Quick Ratio 0.73 1.16 1.42 1
Leverage Ratios
Debt ratio (%)
59.8
0 46.4 43.6 50
Asset Management Ratios
Inventory turnover (Cost) 3.57 5.7 5.7 5.7
Inventory turnover (Selling)
4.19
5 6.9 7.1 7
Fixed asset turnover
12.1
0 10.3 11.84 12
Total asset turnover 2.04 2.6 2.48 3
Average collection period 54 32.00 32 32
Profitability Ratios

Profit margin (%) 0.39 2.64 5.17 2.9
Gross profit margin (%)
14.8
6 17.5 20 18
Return on total assets 0.79 6.88 12.86 8.8
Return on owners' equity 1.96 12.82 22.8 17.5
After analyzing the case we come to a conclusion that even after paying the short term
loan company is still able to pay regular dividend and maintain minimum cash balance.
The flowing calculation proves the above statement:
Projected cash balance =39666
Short term bank loan= 27068
Cash balance after payment of short term bank loan = $39666–$27068
= $12598
Minimum cash balance = 5% of projected sales of 2006
= 5% of $228223
= $11411.15
Now, remaining balance
= $12598–$11411.15
= $ 1186.85
Amount of dividend = $ 0
Now the remaining cash balance after deducting dividend = $1186.85–$0
= $1186.85
Therefore, we can say that even after paying the short term loan the company is still
able to maintain minimum cash balance of $1186.85.
Liquidity ratios:

Current ratio: In 2005 current ratio is poor that is 1.75 and in 2006 it is in satisfactory
level that is 2.35 but in 2007 it is good that is 2.54 in comparison with industry average.
Quick ratio: In 2005 quick ratio is poor that is 0.73 but in 2006 it is good that is 1.16
and in 2007 it is very good that is 1.40 in comparison with industry average.
Leverage ratios:
Debt ratio: In 2005 debt ratio is high which is not good that is 59.80% and in 2006 it
is in satisfactory level that is 46.37% and in 2007 it is satisfactory that is 43.61% in
comparison with industry average .According to debt ratio SRM seems to be quite good
in comparison with industry average of 50%.
0.
0.65
1.3
1.95
2.6
3.25
Current Asset (revised)
Current Asset (revised)
0.
0.4
0.7
1.1
1.4
1.8
Quick Ratio(Revised)
Quick Ratio(Revised)
0.
15.
30.
45.
60.
75.
Debt Ratio(Revised)
Debt Ratio(Revised)

Time interest earned: In 2005 times interest earned is poor that is 1.49 and in 2006 it
is also poor that is 4.38 but in 2007 it is good that is 21.03 in comparison with industry
average. This shows company ability to pay interest is gradually increasing from 2005
to 2007 and in 2007 TIE ratio is even higher than that of industry average.
Assets management ratios:
Inventory turnover (cost): In 2005, inventory turnover ratio is very poor that is 3.57
but in 2006 it is good that is 5.77 and in 2007 it is satisfactory that is 5.60 in comparison
with industry average.
Inventory turnover (selling): In 2005, inventory turnover ratio is poor that is 4.19 and
in 2006 it is good that is 6.91 but in 2007 that is 7 which is satisfactory in comparison
with industry average.
0.
5.5
11.
16.5
22.
27.5
Times Interest Earned (Revised)
Times Interest Earned (Revised)
0.
1.5
3.
4.5
6.
7.5
Inventory Turnover (Cost)(Revised)
Inventory Turnover (Cost)(Rev
0.
2.
4.
6.
8.
Inventory Turnove (Selling)(Revised)
Inventory Turnove (Selling) (Revised)

Fixed assets turnover: In 2005 it is good that is 12.10 but in 2006 it is low that is 10.30
and in 2007 it is satisfactory that is 11.84 in comparison with industry average.
Total assets turnover: In 2005 total assets turnover is not good that is 2.04 and in 2006
it is also not good that is 2.60. But in 2007 total assets turnover is low that is 2.48 in
Average collection period: In 2005, average collection period is high which is not
good that is 53.99 but in 2006 and 2007 it is satisfactory that is 32 in comparison with
industry average.
Profitability ratios:
Profit margin: In 2005, profit margin is good that is 3.9% but in 2006 it is low that is
2.64% but in 2007 profitability ratio is 5.17% which is more good in comparison with
industry average.
9.
9.8
10.5
11.3
12.
12.8
Fixed Assets Turnover (Revised)
Fixed Assets Turnover (Revised)
0.
0.8
1.5
2.3
3.
3.8
Total Assets Turnover (Revised)
Total Assets Turnover (Revised)
0.
15.
30.
45.
60.
AverageCollectionPeriod (Revised)
Average Collection Period (Revised)

Gross profit margin: In 2005, gross profit margin is low that is 14.8% and in 2006 it
is satisfactory that is 17.5% but in 2007 it is good that is 20% in comparison with
industry average.
Return on total assets: In 2005, return on total assets is low that is 7.9 and in 2006 it
is poor that is 6.87 but in 2007 it is good that is 12.86 in comparison with industry
average.
Return on owner’s equity: In 2005, it is good that is 1.95 and in 2006 it is low that is
12.8 but in 2007 it is good that is 22.79 in comparison with industry average.
0.
1.5
3.
4.5
6.
Profit Margin(Revised)
Profit Margin(Revised)
0.
5.
10.
15.
20.
25.
Gross Profit Margin
Gross Profit Margin
0.
3.25
6.5
9.75
13.
16.25
Return on total asset(Revised)
Return on total asset(Revised)

Question 6.
On the basis of your analyses, do you think that the bank should:
a. Extend the existing short and long-term loans and grant the additional
$7012500 loans, 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 bank impose to protect itself on the loans?
Solution:
From our analysis we found that bank should extend the existing short and
long- term loans and grant the additional $7,012500 loans. From the case, we know that
the SRM was a good client of MCNB as they usually never had any due, giving them
unquestioned reputation. From the table 7 of the case we know the liquidity ratio,
leverage ratio, asset management ratio and profitability ratio all are above the industry
average before 2003 before economic downturn.
The current problem occurred due to financial downturn which was forced
on people all around which affect the sales revenue of the firm, but the problem can be
said to be temporary. Since the SRM is planning to step in new venture of custom horse
van, know to be free from recession effect.
0.
6.
12.
18.
24.
30.
Returns on owners equity(Revised)
Returns on owners equity(Revised

As we see in the year 2004-2005 we see that the financial position of the
firm is degrading till 2005. All the ratio from liquidity to profitability are decreasing.
From the Altman Z factor we know the potential failure indication, which has been
decreasing from 6.69 to 2.88. Z Factor being in the gray zone means that the company
must watch its activity very carefully, since bankruptcy is around the corner.
Further, Mr. White had signed a contract for a plant expansion. The company
has jumped into custom horse van which is a beneficial area. According to Mr. White’s
analysis, this area is free from recession. The company’s financial position might
improve significantly over the next two years.
He also projected that the sales growth would be 6% and 9.5% in an average for
2006 and 2007 respectively by installing new facility. From the case we know SRM
will change its policy of aggressive marketing and sales promotion and return to Full
margin pricing. And follow standard industry credit term and tighter credit standards.
With theses changes in place, SRM plans to reduce cost of goods sold to 82.5% in 2006
and 80% in 2007. Similarly SRM plans to decrease its marketing expenses,
administrative and selling expenses from 9% to 8% in 2006 and 7.5% in 2007. Also,
the miscellaneous expense would reduce to 1.75% and 1.25% of sales in 2006 and 2007
respectively.
Hence, on the basis of our analysis we can be assured that if SRM will undertake
new facilities then within two year period SRM will be able to generate enough profit
of (4457.89 in 2006 and 9708.62 in 2007) a total of $14166.51. It is able to fulfill its
loan obligation.
In addition for the purpose of safety, bank should impose collaterals, guarantees
and other safeguards. The collaterals will serve as a value given or pledged as security
for payment of loan. In this case, the bank may charge SRM following collaterals:
 Financial collaterals:
o Stocks,
o negotiable paper
 Merchandise collaterals:
o Warehouse receipts,
o rights in real estates
o machineries,
o furniture,
o livestock.
The most promising collateral option for the bank to charge SRM would be the
new operation which is going to start. Above mentioned collaterals may also be charged
by the bank in securing itself from default. In case of default, the bank may sell the
collateral pledged by SRM and apply the money thus acquired to payment of the debt.

Question 7.
If the bank decides to withdraw the entire line of credit and to demand immediate
repayment of the two existing loans, what alternatives would be open to SRM?
Answer: If the bank decides to withdraw the entire line of credit and to demand
immediate repayment of two existing loans, alternatives that would be open to SRM
are:
i. Additional issues of common stock:
The Silver River Manufacturing Company (SRM) can issue the additional number of
shares of common stock to collect the capital fund and to manage the current problem.
ii. Delay payment made in account payable:
The SRM can delay on payment of account payable. It controls the company’s cash
outflow.
iii. Sales of assets:
The company can sell the ideal fixed assets to generate fund to repay the existing loan.
iv. Pay cut off to dividends:
The company can cut off cash dividend for a certain period of time to manage the cash
balance.
v. Timely collection of accounts receivables:
The company has to make its collection policy stricter so that the creditor will pay in
time, or SRM can sell its account receivable.
Question no. 8
What are some lessons learnt?
After analyzing the case of SRM Company we learnt that:

➢ To analyze the company’s financial position on the basis of ratio
analysis:
After going through all the issues, we are able to analyze financial
position of company. We also further learnt how to interpret the
financial statement by comparing with industry average.
➢ To decide what kind of companies should be given loan:
From the given case of SRM company, we can evaluate that what kind
of loan must be taken or given to the company under the certain criteria
and situation.
➢ To analyze the financial ratios of a company:
We learnt about the various uses and decision making approach ratio
analysis like: liquidity ratio, asset management ratio, debt management
or coverage ratio, profitability ratio, market value ratio and Altman
Z’ factors.
➢ For decision making process:
For the loan purpose the bank must analyze the different ratios of the
company like:
Short-term loan: Liquidity ratio
It includes current ratio and quick ratio.
Long- term loan: Solvency ratio
It includes time interest ratio, debt ratio, profit margin ratio and different
turn over ratios.

Silver River Management Case Study

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