Silver River Case Study

8/9/2019 Silver River Case Study

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Case Study

On

Silver River Company

Submitted to:

Prof. Dr. Radhe Shyam Pradhan

Faculty Member of Financial Management

Submitted by

!lisha Shrestha

!n"u Mahar"an

!yush Prasad #oshi

$habin %imbu

$idya &anda 'adav

(eeta )hapa Magar

#agriti $ohara

*alpana )hapa

M$! +th$atch, -!, /niglobe College

February, 0123


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4ntroduction

Silver River Manufacturing Company (SRM) is a large regional producer of farm and

utility trailers, specialized livestock carriers and mobile home chassis owned by reg

!hite "t depends on farmers for roughly #$ to $% percent of its total sales& 'n, the top

of this, disastrous freezes for two straight winters had devastated loridas citrus and

vegetable industries, transport carriers had hit SRM particularly hard& *he products

manufactured by SRM are not sub+ect 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 ank (MC-) for many years, had never missed a

payment when it was due, and had a reputation of un.uestioned integrity in its

business dealings& More than /$0 of SRMs sales come from the South eastern part

of the 1nited States&

"n the decade prior to 2%%3, SRM had e4perienced high and relatively steady5growth

in sales, assets and profits& *oward the end of 2%%3, the demand for new field trailers

in the citrus and vegetable industries started to fall off& *o maintain the previously

high growth of sales and to reduce the ever6e4panding inventory, SRM not only

reduced prices, but also, as part of an 7integrated market penetration plan8 offered

more favourable credit terms and rela4ed credit standards&

9ence, to finance these increase in assets, SRM turned to Marion Country -ational

ank, (MC-) for long term loan in 2%%# and increase in its short term credit loan in

both 2%%# and 2%%$& MC- had been a ma+or banker of SRM for a long time& :ven

this was insufficient to cover the aggressive e4pansion on the asset side&

Conse.uently, reg !hite who always made prompt payments, started to delay

payments& *his resulted substantial increase in accounts payable and other short term

loans&

1pon analysing SRMs financial conditions, ;esa -i4 found that the banks computer

analysis system revealed a number of significant adverse trends and highlighted

several potentially serious problems& "ts 2%%$ current, .uick and debt ratios failed to

meet the contractual limits of 2,


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had a legal right to call for immediate repayment of both long and short6term loans,

and, if they were not repaid within ten days, could force the company into bankruptcy&

=espite such adverse conditions -i4 considered the company to have good long run

prospects, assuming, of course that management reacted immediately and

appropriately to the current situation& 9ence, -i4 looked upon the threat of

accelerating the loan repayment primarily as a means to get reg !hites undivided

attention and to force him to think about corrective actions that must be taken at once

to reverse the deterioration and to correct SRMs near6term problems& :ven 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, -i4 realized that

the banks e4aminers, due to the recent spate of bank failures, were very sensitive to

the issue of problem loans& SRMs >ltman ? factor (2&//) for 2%%$ was below 2&@@

which indicated that SRM was likely to get bankrupt in two years& ecause of this

deficiency, MC- was under increased pressure from the regulators to reclassify

SRMs loan as Aproblem category and take whatever steps needed to collect the

money due and reduce the banks e4posure as .uickly as practicable& "n order to avoid

reclassification, SRM re.uired strong and convincing evidence to prove that its

problems were temporary in nature and it had good chance of reversing the trend&

*he current financial problems were not the only problem Mr !hite faced& 9e had

recently signed a contract for a plant e4pansion that would re.uire another

B%,lso

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

e4isting loans&


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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 reg

!hite "t depends on farmers for roughly #$ to $% percent of its total sales& 'n, the top

of this, disastrous freezes for two straight winters had devastated loridas citrus and

vegetable industries, transport carriers had hit SRM particularly hard&

Silver River Manufacturing Company facing the problems of sales decreasing and

losing market share price& "t leads the company in to the bankruptcy position& *he

financial position of the company is deteriorating& *he financial report of the company

are representing deficit in 2%%$& *he company needs some more investment to

overcome these problems occurs due to the losses in the business& or the loan

purpose, the MC- re.uires .uarterly financial statements from the SRM&

i) "s "ncome statement of Silver River Manufacturing Company (SRM) is

improvement than previous yearEii) "s improved financial position in 2%%$ as compare with previous yearEiii) 9ow =uFont >nalysis present financial health of Silver River

Manufacturing Company (SRM)

iv) !hat are the challenging issues of Silver River Manufacturing Company(SRM) in industryE

%esson %earnt:

i) *o analyzed the case of the companyG

ii) *o calculate the financial ratios and know its interpretationG

iii) ;earn to compare the financial ratios with industry averageG

iv) ;earn to compute and analyze du pont systemG


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Data Presentation 5 !nalysis of capital mar6et

Huestion


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4ncrease9decrease in current liabilities

>F change 3,#2&


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Net increase in

or*in& capita' 7,001.40 0

/ota' ses 11,1#6.70 3223.27261.3"$2773.

13$1"".76

Analysis o

changes in

woring capital

!ncrease

(decrease) in

current assets

+as- c-an&e 1,145."3 #6.71 3#05.774002.4"

c-an&e 1,364.25 10"#4."6 2#356."6

1"462.00

N c-an&e 14,0#5.12 1362#.75 4665".62

3302"."7

+ c-an&e 14,313.54 24427.#

#6.71$10"#4.

"6$1362#.75

!ncrease(decreas

e) in current

lia"ilities

c-an&e 3,742.13 #4#2.3" 1###".3#

10506.01

N c-an&e 1,#12.50 13132.5 1"232.505100.00

++ c-an&e 1,657.50 2231.2" 7331.2"5100

+% c-an&e 7,312.13 24"56.15 45562.17

20706.02

Net

increase(!ecrease)

in or*in& capita'

7,001.41 42".25 + c-an&e

+% c-an&e

24427.#


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24"56.15

(b) Calculate SRMs Jey financial ratios for 2%%$ and compare them with those

of 2%%3, 2%%#< industry average and contract re.uirement or complete table &

#a"le 2$Sil%er &i%er 'anuacturing Copany

&atio Analysis ear *nded Dece"er +,

Farticulars 2%%3 2%%# 2%%$

"ndustry

>verage

%i=uidity ratios

Current ratio (*imes) 3&% 2&D/


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Return on total

assets(0)


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Return on ownerKs e.uity

(-et income L *otal

e.uity)


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with industry average but in 2%%$ debt ratio is risky that is $@&/%0 in comparison

with industry average&

)imes interest earned:"n 2%%3 time interest earned ratio is


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4nventory turnover ratio 9selling:"n 2%%3 inventory turnover ratio (selling) is @&%3

which is good but in 2%%# inventory turnover ratio (selling) is $&$@ which is poor and

in 2%%$ it is very poor that is #&


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)otal asset turnover:"n 2%%3 total asset turnover is 3&%D which is good but in 2%%#

total asset turnover is poor that is 2&D% and in 2%%$ total asset turnover ratio is low

which is 2&%# in comparison with industry average&

!verage collection period:"n 2%%3 average collection period is 3D which is not good

and again in 2%%# average collection period is not good that is $3&@& >nd in 2%%$ it is

more risky that is $3&@@ in comparison with industry average&

Profitability ratios:

Profit margin:"n 2%%3 profit margin is $&$% which is good& "n 2%%# the profit margin

is 3# which is good but in 2%%$ the profit margin is %&3@ which is very poor in

comparison with industry average&


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(ross profit margin:"n 2%%#, gross profit margin is 2%&/@0 which is good and in

2%%# the gross profit margin is nd in 2%%$ it is


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Return on o


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Particulars 9RO7 A &PM B !sset

turnover

B 7=uityMultiplier

N Netncomea'es

O a'es/ota' ssets

O ssetit8

2%%3 2/#3 N $&$% O 3&%D O


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2%%$


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P2N retained earnings L total assets

P3N earnings before interest and ta4es L total assets

P#N market value of e.uity L book value of total debt (market value of e.uity includes

both preferred and common shares, and debt includes current and long6termliabilities)

P$N sales L total assets

For 0118

? N verage N


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:"* N B verage N


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:"* N B verage N


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:"* N B ###3&2$

Market value of e.uity N B 3$%%&$#

ook value of debt (*otal ;iability) N B $#D#&2@

Sales N B


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3& !sset management ratiosG *he ma+or asset management ratios are showingdeclining trend from 2%%3 to 2%%$& *he =u Font analysis also shows that theasset turnover ratio has decreased from 3&%D in 2%%3 to 2&%# in 2%%$& *heindustry average is 3& *he assets have not been efficiently utilized to generatesales&

#& Financial leverageG rom our analysis we find that in 2%%$ Company has$@&/%0 debt ratio, it tells us that the company financed more than half of itsassets by borrowing& Comparing with industry average of $%&%%, SRM is usingmore debt to finance its assets than its competitors& *he =u Font analysis alsoshow that the e.uity multiplier is higher in 2%%$ as compared to 2%%3, 2%%#and industry average& *his indicates that the company has high chances of

being bankrupt&

>uestion 8.

"f the bank were to maintain the present credit lines and grant an additional

BD,3$,%%% short6term loan at a


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Particulars 011; 011H Pro"ected 011+ Pro"ected

-et sales


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-et fi4ed assets


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or6ing of )able ;:

2. Retained 7arnings

or 2%%DG Retained earnings (2%%$) Q >dditions in 2%%D


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*herefore, inventory N 32,#$$&5!, 4s the firm able to retire the all short term loan e?isting on December 82,

011H.

>t the end of 2%%D the pro+ected cash balance is 3D#$%&23 (%%%8),

>nd the pro+ected short term loan at 2%%D would be 2#D%&$%& *he company is able to

retire all its loan since the cash balance is higher than the short term loan balance&

*he remaining balance would be (3D#$%&2362#D%&$%) N B


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%everage ratios

=ebt ratio (0) $@&@ $/&/3 $#&@/ $%&%%

-ot

good

-ot

good*imes interest earned


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Huick RatioG"tis %&3 times which is very poor in comparison of industry average&!hereas in 2%%D, it is


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*imes "nterest :arned RatioG "n 2%%$*imes "nterest :arned Ratio is ll these ratios are poorcompared to industry average&

!sset Management Ratio

"nventory *urnover (Cost)G "nventory *urnover ratio in year 2%%$ is 3&$ which is

poor compared to industry average& !hereas "nventory *urnover Ratio in 2%%D is $&/and in 2%% is $&D which are satisfactory in comparison to industry average&


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"nventory *urnover (Selling)G "n 2%%$ "nventory *urnover Ratio (selling) is #&


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>verage Collection FeriodG "n 2%%$, >verage collection period is $3&@@ dayswhich is poor compared to industry average& !hereas in both 2%%D and 2%%, it is 32

which is very satisfactory&

Profitability Ratio

Frofit MarginG "n 2%%$, Frofit Margin is very poor at %&3 0 compared to "ndustry>verage& 9owever in 2%%D it increases to 2&


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ross Frofit MarginG ross Frofit Margin is verage&

Return on total >ssetsG "n 2%%$, Return on *otal >ssets is very poor at %&3@0&Similarly in 2%%D it is again very poor at %&%#0& 9owever it is /&2/0 which is

satisfactory in comparison to "ndustry >verage&


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Return on 'wners :.uityG "n 2%%$, Return on 'wners e.uity is


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#a"le Sil%er &i%er 'anuacturing Copany

Pro Forma Balance Sheets (Revised)

Worksheet for Year End 200 (!ho"sands of #ollars)Particulars 011; 011H Revised 011+ Revised

!ssets

Cash 3,@%$&


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Sil%er &i%er 'anuacturing CopanyRatio $nal%sis Year Ended #ecem&er ' (Revised)

Particulars 011; 011H Revised 011+ Revised 4ndustry average

%i=uidity Ratios

Current ratio


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Cash balance after payment of short term bank loan N B3D#$%&23 B 2#D%&$%

N B


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;everage ratiosG

=ebt ratioG "n 2%%$ debt ratio is high which is not good that is $@&/%0 and in 2%%D it

is in satisfactory level that is #D&30 and in 2%% it is satisfactory that is #3&D


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>ssets management ratiosG

"nventory turnover (cost)G "n 2%%$, inventory turnover ratio is very poor that is 3&$

but in 2%%D it is good that is $& and in 2%% it is satisfactory that is $&D% in

comparison with industry average&

"nventory turnover (selling)G "n 2%%$, inventory turnover ratio is poor that is #&


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i4ed assets turnoverG "n 2%%$ it is good that is


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>verage collection periodG "n 2%%$, average collection period is high which is not

good that is $3&@@ but in 2%%D and 2%% it is satisfactory that is 32 in comparison with

industry average&

Frofitability ratiosG

Frofit marginG "n 2%%$, profit margin is good that is 3&@0 but in 2%%D it is low that is

2&D#0 but in 2%% profitability ratio is $&


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Return on total assetsG "n 2%%$, return on total assets is low that is &@ and in 2%%D it is

poor that is D&/ but in 2%% it is good that is


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>uestion H.

'n the basis of your analyses, do you think that the bank shouldG

a& :4tend the e4isting short and long6term loans and grant the additionalBD,3$,%%% loans, or

b& :4tend the e4isting short and long6term loans without granting theadditional loan, or

c& =emand immediate repayment of both e4isting loansE

"f you favour (a) or (b) above, what conditions (collateral, guarantees, or other

safeguards) should the bank impose to protect itself on the loansE

Solution:

rom our analysis we found that bank should e4tend the e4isting short and long6 term

loans and grant the additional BD,3$,%%% loans& rom the case, we know that the

SRM was a good client of MC- as they usually never had any due, giving them

un.uestioned reputation& rom the table of the case we know the li.uidity ratio,

leverage ratio, asset management ratio and profitability ratio all are above the industry

average before 2%%3 before economic downturn&

*he 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&

>s we see in the year 2%%#62%%$ we see that the financial position of the firm is

degrading till 2%%$& >ll the ratio from li.uidity to profitability are decreasing& rom

the >ltman ? factor we know the potential failure indication, which has been


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decreasing from D&D@ to 2&//& ? actor being in the gray zone means that the company

must watch its activity very carefully, since bankruptcy is around the corner&

urther, Mr& !hite had signed a contract for a plant e4pansion& *he company has

+umped into custom horse van which is a beneficial area& >ccording to Mr& !hites

analysis, this area is free from recession& *he companys financial position might

improve significantly over the ne4t two years&

9e also pro+ected that the sales growth would be D0 and @&$0 in an average for 2%%D

and 2%% respectively by installing new facility& rom the case we know SRM will

change its policy of aggressive marketing and sales promotion and return to ull

margin pricing&>nd follow standard industry credit term and tighter credit standards&

!ith theses changes in place, SRM plans to reduce cost of goods sold to /2&$0 in

2%%D and /%0 in 2%%& Similarly SRM plans to decrease its marketing e4penses,

administrative and selling e4penses from @0 to /0 in 2%%D and &$0 in 2%%& >lso,

the miscellaneous e4pense would reduce to


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>uestion +.

"f the bank decides to withdraw the entire line of credit and to demand immediate

repayment of the two e4isting loans, what alternatives would be open to SRME

!ns


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>uestion no. I

!hat are some lessons learntE

>fter analyzing the case of SRM Company we learnt thatG

*o analyze the companys financial position on the basis of ratio

analysisG

!e +ust go through all the issues, problems of the SRM company for

which we are able to analyze financial position of company& !e also

learnt that how to interpret the financial statement with comparing of

inventory average&

*o decide what kind of companies should be given loanG

rom 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&

*o analyze the financial ratios of a companyG

!e learnt about the various uses and decision making approach ratio

analysis likeG li.uidity ratio, asset management ratio, debt management

or coverage ratio, profitability ratio, market value ratio and >ltman ?

factors&


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or decision making processG

or the loan purpose the bank must analyze the different ratios of the

company likeG

Short6term loanG ;i.uidity ratio

;ong6 term loanG Solvency ratio

Silver River Case Study

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