This document presents a case study on Silver River Manufacturing Company. It includes an introduction to the company and issues it is facing. Financial statements and ratios for 2018-2020 are analyzed. Key issues identified are declining sales and poor financial ratios. The DuPont analysis and Altman Z-score are calculated to further assess the company's financial strength and weaknesses. Projections for 2021-2022 income statements are also provided.

1. Case Study on Silver Manufacturing
Company
Presented by: Manisha Kumari Karki
Safal Gyawali
Srijana Pathak

2. Table of Content
• Introduction
• Issue 1(a)
• Issue 1(b)
• DuPont
• Altman Z
• Issue 3
• Issue 4
• Issue 5
• Issue 6
• Issue 7
• Issue 8
• Conclusion

3. Introduction
• Publicly traded US based regional producer owned by Greg White
• More than 85% of sales of SRMcome from southern east U.S
• SRM is major client of Marion Country National Bank (MCNB) which is loyal and
profitable
• Decline on sales due to recession in business
• mcn’s computer highlighted deficiency in ratio trends for SRM
• Extension part of SRM include recession proof planning of custom horse vans.

4. Issue 1(a)
• For analyzing the financial position of the business it is essential to make comparison with how it was in
previous years.
• Statement of changes in financial position for 2020
• calculate SRM’s key financial ration for 2020 and compare them with those of 2018, 2019 industry average
and contract requirement.
Particulars 2019 2020
Sources of funds
Net income after tax 6,987 831
Depreciation 1,823 2,244
Funds from operations 8,810 3,075
long term loan 3,506 -
net decrease in working capital
Total sources 12,316 3,075
Applications of funds
Mortgage charge 295 287
Fixed assets charge 2,574 3,051
dividends on stocks 1,747 208
net increases in working capital 7,702 (471)

5. Analysis of changes in working capital 2019 2020
Increase (Decrease) in current assets
cash change (1,260) (107)
AR change 1,501 11,985
INV change 15,505 14,992
CA change 15,745 26,870
Increase (Decrease) in current Liabilities
AP change 2,104 14,446
NP change 4,116 10,441
ACC change 1,823 2,454
CL change 8,043 27,341
Net increase (Decrease) in working capital 7,702 (471)
Cont….

6. Interpretation
There are following changes in the financial position of 2020 in compare to 2019:
i. Net profit decreased when compare with previous year
ii. Source of fund is decresed so net profit is decreased
iii. Long-term debt unchanged
iv. Reduce in working capital due to excess use of funds
v. Account receivable is also increased

7. Issue 1(b)
• Mr. White realized the financial position of company is in serious condition.
• A call from Lesa Nix from MCNB informed that the bank was seriously considering
reducing, if not eliminating, credit lines at a time when they were more needed than
ever.
• SRM’s previous two years data i.e. in 2018 and 2019, current, quick, and debt ratios
are all below the contractual limits of 2.0, 1.0, and 55 percent, respectively, according
to financial statement analysis. Similarly, the contractual limits are not met in 2020 as
well which can be seen in the following table:

8. Particulars 2018 2019 2020 Industry Average Remarks
Liquidity ratios
Current ratio 3.07 2.68 1.75 2.5 Poor
Quick ratio 1.66 1.08 0.73 1 Poor
Leverage ratios
Debt ratio (%) 40.46 46.33 59.8 50 Poor
Times interest earned 15.89 7.97 1.48 7.7 Poor
Asset management ratios
Inventory turnover (Cost) 7.14 4.55 3.57 5.70 Poor
Inventory turnover (Selling) 9.03 5.59 4.19 7.00 Poor
Fixed asset turnover 11.58 11.95 12.10 12.00 OK
Total asset turnover 3.06 2.60 2.04 3.00 Poor
Average collection period 36.00 35.99 53.99 32.00 Poor
Profitability ratios
Profit margin (%) 5.50 3.44 0.39 2.90 Poor
Gross profit margin (%) 20.89 18.70 14.86 18.00 Poor
Return on total assets 16.83 8.95 0.79 8.80 Poor
Return on owner's equity 28.26 16.68 1.96 17.50 Poor
Potential failure indicator
Altman Z factor 6.152 4.655 2.88 1.81/2.99

9. Interpretation
Liquidity ratios: poor liquidity ratios and liquidity position is poor
Leverage ratios: leverage ratio is poor so it shows that company financial position is
weak.
Asset management ratios: Asset management ratios measure how effectively and
efficiently a company is using its assets to produce sales and grow the business. Asset
Management Ratios attempt to measure the firm's success in managing its assets to
generate sales. In case fixed asset turnover is good but other than fixed Asset turnover
ratio are poor so we can say that company is unable to manage its asset efficently and
effectively.

10. Cont...
Profitability ratios: Profitability ratio is used to evaluate the company’s ability to
generate income with its expenses and other cost related in generation of the income of
the company during a particular period. This ratio These ratios helps in analyzing
companys overall profitability. Here profitability ratios are poor so company face the
recession.

11. Current ratio
3.5
3
2.5
2
1.5
SRM
Industry
Contract
1
0.5
0
2018 2019 2020

12. Quick ratio
1.8
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
SRM
Industry
Contract
2018 2019 2020

13. Debt ratio and Time interest earned
70
60
50
40
30
DebtRatio
IndustrialAverage
contract
20
10
0
2018 2019 2020
TimeInterestEarned
16
14
12
10
8
6
4
2
0 2018 2019 2020
TimeInterestearned IndustrialAverage

14. Fixed assest and Total assest turnover
FixedAssetsTurnover
12.2
12.1
12
11.9
11.8
11.7
11.6
11.5
11.4
11.3
11.2
11.2
2018 2018 2020
FixedAssetsTurnover IndustryAverage
TotalAssetsTurnover
3.5
3
2.5
2
1.5
1
0.5.
0
2018 2019 2020
TotalAssetsTurnover IndustryAverage

15. Average collection period and Profit margin
AverageCollectionPeriod
60
50
40
30
20
10
0
2018 2019 2020
AverageCollectionPeriod Industryaverage
ProfitMargin
7
6
5
4
3
2
1
0
1
0
2018 2019 2020
ProfitMargin IndustryAverage

16. Gross profit margin and Return on total assests
6
5
4
3
Series
1
Series
2
Series
3
2
1
0
201
8
201
9
202
0
202
1
ReturnonTotalAssets
20
15
10
5
0
2018 2019 2020
ReturnonTotalAssets IndustryAverage

17. Return on equity
ReturnonEquity
35
30
25
20
15
10
5
0
2018 2019 2020
ReturnonEquity IndustryAverage

18. Issue 2
• Issue 2 based on the case data and result of your analysis and question no. 1
• what sre the SRM’s strengths and weakness?
• what are the causes there of?
• (Use of the Du pont system and Altman Z factor would facilitate snalysis and
strengthen your answer? )

19. Altman Z factor
The Altman Z Score is used to predict the likelihood that a business will go bankrupt within the next two years. The
formula is based on information found in the income statement and balance sheet of an organization; as such, it can
be readily derived from commonly-available information. It cab be a positive or negative indication according to the
greater than or less than the mean by how much standers deviation. A Z score formula is as follows:
Z= 0.012 X1 +0.014 X 2 +0.033 X3+0.006 X4+0.999 X5
Where,
• X1 =
𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑨𝒔𝒔𝒆𝒕𝒔−𝑪𝒖𝒓𝒓𝒆𝒏𝒕 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔
𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔
×100
• X2 =
𝑹𝒆𝒕𝒂𝒊𝒏𝒆𝒅 𝑬𝒂𝒓𝒏𝒊𝒏𝒈𝒔
𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔
× 100
• X3=
𝑬𝑩𝑰𝑻
𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔
× 100
• X4=
𝑴𝒂𝒓𝒌𝒆𝒕 𝑽𝒂𝒍𝒖𝒆 𝒐𝒇 𝑬𝒒𝒖𝒊𝒕𝒚
𝑩𝒐𝒐𝒌 𝑽𝒂𝒍𝒖𝒆 𝒐𝒇 𝑻𝒐𝒕𝒂𝒍 𝑫𝒆𝒃𝒕𝒔
× 100
• X5=
𝑺𝒂𝒍𝒆𝒔
𝑻𝒐𝒕𝒂𝒍 𝑨𝒔𝒔𝒆𝒕𝒔

20. Calculation of Altman Z factor of silver river
manufacturing
year 2018 2019 2020
X1 49.03% 49.038% 35.75%
X2 17.94% 20.86% 15.99%
X3 34.53% 19.69% 4.624%
X4 275.01% 103.4% 6.09%
X5 3.06 times 2.6 times 2.036 times
Z 6.69 4.75 2.88
Remarks Safe Safe Gray zone

21. Altman Z Factor Graph
AltmanZfactor
6
5
4
3 AltmanZfactor
2
1
0
2018 2019 2020

22. Interpretation of Altman Z factor
• Altman Z score is a multivariable analysis that evaluates bankruptcy utilizing
financial ratios. This method involves combining several financial ratios into a
single predictive equation. Z score are interpreated as follws:
• Z score above 3.0 is high profitability of no failure
• Z score below 1.8 is high profitability of failure
• Z score between 1.8-3.0 is hard to predict with confidence whether the firm will
fail or not and range is as gray zone.

23. DuPont Analysis
• The Du Pont analysis says that ROE is affected by three things: Which help to
improve the overall performance of the company.
i. Operating efficiency as measured by profit margin.
ii. Asset use efficiency as measured by total assets turnover.
iii. Financial leverage as measured by equity multiplier.

24. Date Net profit margin
(NPM)
Total assets turnover
(TAT)
Equity Multiplier (EM) ROE
2018 5.5 3.056 1.68 28.22%
2019 3.44 2.603 1.863 16.68%
2020 0.39 2.04 2.49 1.96%
Industry Average 2.90 3.00 2 17.50%
Remarks Poor Poor Poor Good

25. Du Pont Graph
ReturnonEquity
35.00%
30.00%
28.26%
25.00%
20.00%
17.50%
16.68%
17.50% 17.50%
15.00%
10.00%
5
.
0
0
%
1.96%
0.00%

26. Interpretation of DuPont:
• Equity multiplier is risky as company has higher EM than the industry average.
• Net Profit Margin (NPM) seems poor as Company has lower rate than industry
average.
• Total Assets turnover (TAT) is also low in comparison to industry average which
shows the poor result.

27. Strength of SRM
• the fixed asset turnover ratio of 2018, 2019, 2020 is 11.58, 11.95 and 12.10 which is
in increasing order. Furthermore, its ability to produce revenue from its assets is more
efficient than the industry. this demonstrates that the fixed assets are being used
successfully.
• from 2018(6.69) to 2020(2.88) Altman Z score declining and so in 2020 Altman
factor is 2.88 which is compatible with industry average but declining trend is not a
good for a company. SRM company is in gray zone but company have to take a
decision with carefully.

28. Weakness of SRM
• According to the the calculation in 2020 current ratio and quick ratio are less then
industry average.
• Company debt ratio is higher then industry average, but company debt financing
should be less and it should be encouraged to employe more stock for management.
• Earning per share has been decreased then before year so it shows that company poor
performance.
• Interest ratio is less so it is risk for company.
• Profitability ratio is decreasing than previous year and industy average.

29. Issue 3
The projection for the year 2021 and 2022 are done on following basis:
• Sales growth rate is 6% and 9.5% for the year 2021 and 2022 respectively.
• Reduce the level of COGS from 85%of sales in 2020 to about 82.5% of sales in
2021 and 80% in 2022.
• Administrative and selling expenses has reduced from 9% of sales to 8% in 2021
and 7.5% in 2022.
• Miscellaneous expense reduced to 1.75% and 1.25% of sales in 2021 and 2022
respectively

30. Pro forma Income Statements(Projected)
(Thousands of Dollars)
particulars 2020 2021(projected) 2022(projected)
Net sales 215,305 228,223.3 249,904.51
Cost of good sold 183,305 188,284.22 199,923.62
Gross profit 31,998 39,939.05 49,980.91
Administrarive and selling 18,569 18,257.86 18,742.84
Depreciation 2,244 2,665 2,006
Miscellaneous expenses 6,297 3,993.91 3,123.81
Total operating expenses 27,110 24,916.77 23,872.65
EBIT 4,888 15,022.27 26,108.25
Interest on short term loans 2,006 4,331 4,331
Interest on long-term loans 1,052 1,052 1,052
Interest on mortgage 233 210 189
Net income before tax 1,597 9,429.27 20,536.26
Taxes 767 4,526.05 9,857.40
Net income 831 4,903.226 10,678.85
Dividents on stock 208 - -
Additions to retained earnings 623 4,903.27 10,678.85

31. Interpretation
• In issue 3, Net sales in 2020,2021,2022 are 215,305, 228,223.3 and 249,904.51
respectively.
• After deducting COGS Gross profit are 31,998, 39,939.05 and 49,980.91
• Net income are 831, 4,903.226 and 10,678.85 in 2020, 2021 and 2022.
• In 2021 and 2022 there is no dividend.

32. Projected Balance Sheet
(thousands of dollars)
Assets 2020 2021 (Projected) 2022(Projected)
Cash 4,296 39,666.38 49,528.03
Receivable’s 32,293 20,286.52 22,213.34
Inventory 51,324 33032.32 35,074.317
Total current asset 87,913 92,985.23 106,816.08
Land, building, plant and equipment 25,161 32,173 33,139
Less depreciation expenses (7,363) (10,028) (10,939)
Net fixed assets 17,798 22,145 22,199
Total assets 105,711 11,5130.23 129,015.08

33. Liabilities and Equities 2020 2021 (Projected) 2022 (Projected)
Short term bank loans 20,056 27,068 27,068
Accounts payable 21,998 17,594 18,474
Accruals 8,064 10,231 12,789
Total current liabilities 50,118 54,894 58,331
Long Term Loan 10,519 10,519 10,519
Mortgage 2,574 2,314 2,083
Long term debt 13,092 12,833 12,602
Total liabilities 63,211 67,727 70,933
Common stock 25,596 25,596 25,596
Retained earnings 16,904 21,807.23 32,486.08
Owners' equity 42,600 47,403.23 58,082.08
Total liabilities and equity 105,711 115,130.23 129,015.08

34. Interpretation:
• Assets and liabilities and equity are equal , for 2020, 2021 and 2022 are
105,711, 115,130.23 and 129,015.08 respectively.
• Short term loan for 2020, 2021 and 2022 are 20,056, 27,068 and 27,068.
• Return earning for 2020, 2021 and 2022 are 16,904, 21,807.23 and
32,486.08.

35. Issue 4
Calculation of ratios are very important for analyzing the financial position for any
organization.
The calculation of various ratios and compare with industry average.

36. Calculation of Projected Ratios
Particular 2020 2021 projected 2022 projected industry average Remarks (2021) Remarks (2022)
Liquidity Ratio
current ratio 1.75 1.69 1.82 2.5 poor poor
quick ratio 0.73 1.09 1.21 1 ok ok
Leverage ratio
Debt ratio (%) 59.8 58.8 55 50 poor poor
Times interest earned 1.49 2.68 4.68 7.7 poor poor
Asset management ratios
inventory turnover (cost) 3.57 5.7 5.7 5.7 ok poor
inventory turnover (selling) 4.19 6.9 7.12 7 good good
fixed assets turnover 12.1 10.31 11.23 12 poor poor
Total assets turnover 2.04 1.98 1.95 3 poor poor
Average collection period 53.99 32 31.99 32 ok ok
Profitability ratios
profit margin (%) 0.39 2.14 4.27 2.9 ok ok
Gross profit margin (%) 14.86 17.5 20 18 poor ok
Return on total assets 0.78 4.26 8.28 8.8 poor ok
Return on owners equity 1.95 10.34 18.38 17.5 poor poor

37. Conclusion
The projected data reveals promising outcome for SRM company in the
future, it shows that improving trend. However SRM needs to improves
its total assets turnover ratio, debt equity and current assets ratio.
SRM can achive a better ratio by doing following things:
• Debt restructuring
• Issue new stocks
• Improving inventory management
• Increasing revenue

38. Issue 5
• If Company paid short term loan in earlier in 2021, do you think that company is still
able to pay regular dividends and maintain minimum cash balance? do you find any
situation developing that may indicate poor financial policy? what should be the
impact of such situation on the ratios for the company, and are such impacts
necessarily either good or bad? why?
• The revised financial statement for projected year 2021 and 2022 are stated below:

39. Silver River Manufacturing Company’s
Pro Forma Income Statement (revised)
(Thousands of Dollars)
Particulars 2020 2021 2022
Net Sales 215,305 228223.3 249904.52
COGS 183,307 188284.22 199923.61
Gross Profit 31,998 39939.05 49980.90
Administrative and selling cost 18,568 18257.86 18742.89
Depreciation 2,244 2665 2006
Miscellaneous. Expenses 6,297 3993.91 3123.81
Total operating expenses 27,110 24916.77 23872.65
EBIT 4,888 15022.27 26108.26
Interest on short term loan 2,006 2165 2165
Interest on long term loan 1,052 1052 1052
interest on mortgage loan 233 210 189
EBT 1,597 11595.27 22701.76
Taxes @48% 767 5565.73 5675.44
net income 831 6029.54 17026.32
dividend on stock 0.25 208 1507.38 4256.58
additional to retained earning 623 4522.15 12769.74

40. Interpretation
•In issue 5, Net sales in 2020,2021,2022 are 215,305, 228,223.3 and
249,904.51 respectively.
•After deducting COGS Gross profit are 31,998, 39,939.05 and
49,980.91
• Net income are 831, 6029.54 and 17026.32 in 2020, 2021 and 2022.
•In 2021 and 2022 there is 25% dividend.

41. Silver River Manufacturing Company’s
Pro Forma Balance sheet (revised)
(Thousands of Dollars)
Assets 2020 2021(proj) 2022(proj)
Cash 4296 12216.32 25,263.77
Receivable 32293 20,286.52 22,213.74
Inventories 51324 33,032.32 35,074.32
Total current assets 87913 65535.16 82,551.02
Land, building, plant and equipment 25162 32,173 33,139
Less: depreciation (7363) (10,028) (12,033)
Net fixed assets 17798 22,145 21,105
Total assets 105711 87,680.16 103,656.89
Liabilities and equities 2020 2021 2022
Short term bank loan 20056 0 0
Accounts payable 21998 17,594 18,474
Accruals 8064 10,231 12,789
Total current liabilities 50118 27,826 31,263
Long term bank loan 10519 10,519 10,519
Mortgage 2575 2.314 2,083
Long term debt 13092 12,833 12,602
Total liabilities 63,211 40,658 43,865
Common stock 25,596 21,426.15 25,596
Retained earnings 16,904 2,021 34,195.89
Owner's equity 42,500 47,022.16 5,9,791.2

42. Interpretation
• Assets and liabilities and equity are equal , for 2020, 2021 and 2022
are 105,711, 87,680.86 and 103,656.89 respectively.
• Short term loan for 2020 is 20,056.
• There is no short term loan for 2021 and 2022
• Return earning for 2020, 2021 and 2022 are 16,904, 2,021 and
34,195.89

43. Particular 2020 2021 Revised 2022 Revised industry average Remarks (2021) Remarks (2022)
Liquidity Ratio
current ratio 1.75 2.38 2.54 2.5 good good
quick ratio 0.73 1.19 1.42 1 good poor
Leverage ratio
Debt ratio (%) 59.7 55.95 43.95 50 poor Poor
Times interest earned 1.48 4.38 7.66 7.7 poor Good
Asset management ratios
inventory turnover (cost) 3.57 5.7 5.7 5.7 good Good
inventory turnover (selling) 4.19 6.91 7.12 7 good Good
fixed assets turnover 12.1 10.31 11.23 12 poor Poor
Total assets turnover 2.04 2.58 2.49 3 poor Poor
Average collection period 53.99 32 32 32 good good
Profitability ratios
profit margin (%) 0.39 2.32 3.54 2.9 good poor
Gross profit margin (%) 14.86 17.50 20 18 poor poor
Return on total assets 0.79 5.99 8.8 8.8 poor Good
Return on owners equity 1.96 11.09 15.63 17.58 poor poor
Calculation of Revised ratios

44. Current and Quick Ratio
3
2
1
SRM
industry
0
2020 2021 2022
1.6
1.4
1.2
1
0.8
0.6
0.4
0.2
0
SRM
industry
2020 2021 2022

45. Debt Equity ratio and Time Interest Earned ratio
7
6
5
4
3
SRM
indust
ry
2
1
0
202
0
202
1
202
2
9
8
7
6
5
4
3
2
1
0
SRM
industr
y
2020 2021 2022

46. Inventory turnover ration cogs
1
0
8
6
4
SRM
industry
2
0
2020 2021 2022

47. Inventory turnover ration sales
12
10
8
6
4
SRM
industry
2
0
2020 2021 2022

48. Fixed assests and Total assests turnover ratio
3.5
3
2.5
2
1.5
SRM
industry
1
0.5
0
2020 2021 2022
12.5
12
11.5
11
10.5 SRM
industry
10
9.5
9
2020 2021 2022

49. Average collection period and Profit margin
60
50
40
30
20
SRM
industr
y
1
0
0
2020 2021 2022
6
5
4
3
2
SRM
industry
1
0
2020 2021 2022

50. Gross profit margin
25
20
15
10
SRM
industry
5
0
2020 2021 2022

51. Return on Total assests
14
12
10
8
6
SRM
industry
4
2
0
2020 2021 2022

52. Return on total Equity
25
20
15
10
SRM
industry
5
0
2020 2021 2022

53. Issue 6
On the basis of our analysis we think that the loan should be granted.
• Should Issue additional loan of $7,012,500 and extend the existing short term and
long term loan
• SRM is paying its interest on time.
• Analysis, 2018, 2019, 2020 financiaol ratios, Altman Z factor
• The sales is projected to grow.
• SRM is planning to cut its administration expenses.
• Negative effect on financial position is due to external factors not operation failure.
• Bank should impose collaterals, safeguards and guarantee

54. Issue 7
If the bank decides to withdraw the entire line of credit and demand immediate
repayment of loan following alternatives can be used:
• Equity Financing
• Sell account receivable and liquidate inventory
• Propose loan from another bank.
• Increase account payable period.
• Collect the amount in advance
• Debt Financing
• Apply for the foreign loans
• Sales of fixed assets

55. Issue 8
Lessons learnt
• To examine various ratios in order to analyze financial conditions.
• To understand the company's financial situation.
• Participation of owners and other organizational members in decision making.
• To be aware of the business's financial performance throughout a specific time frame.
• Altman Z score which help to find out whether company is going to bankrupt.
• A thorough study of the business to prepare it for risky uncertainty.
• To use the Du Pont system to determine the company's Strength and weakness.
• Prepare balance sheet of the company.
• Prepare the income statement.
• Decide the company is eligible for loan or not.
• Dcecide that whether compnay should distribute cash dividend in certain year.