CASE: FINANCIAL ANALYSIS

Silver River Manufacturing Company

As the smoke from his neglected cigar drifted lazily across the room, Greg White began to realize the
main implication of the situation: there was an outside chance that he could lose the company. He
leaned back in his chair and stared off into space as the reality started to sink in. How had he let the
situation develop? Why hadn't he foreseen the trends that, with hindsight, were so obvious, and then
taken actions to avoid the problems that now "had his back to the wall"?

The cause of his introspective mood was a call from Lesa Nix, vice-president of the Marion County
National Bank (MCNB) and a member of the bank's Senior Loan Committee. Several years ago, Nix
had been the MCNB loan officer who handled the Silver River Manufacturing Company (SRM)
account. Although she had been promoted and no longer had day-to-day responsibility for the account,
Nix still maintained an active interest in it because she had known White, the founder and president of
SRM, for many years and considered him to be both a good friend and a pillar of the community. The
event that led to the telephone conversation was the filing of a deficiency report, generated by the
bank's computerized analysis system, which alerted the Senior Loan Committee to the deteriorating
financial position of Silver River Manufacturing Company. The bank requires quarterly financial
statements from each of its major loan customers. Information from such statements is fed into the
computer, which then calculates key ratios for each customer, charts trends in these ratios, and
compares the statistics for each company with the average ratios of other firms in the same industry
and against any protective requirements in the loan agreements. If any ratio is significantly worse than
the industry average, reflects a marked adverse trend, or fails to meet contractual requirements, the
computer highlights the deficiency.

The deficiency report revealed a number of significant adverse trends and highlighted several
potentially serious problems (see Tables 1-7 for the financial statements and partial analyses thereof).
Particularly disturbing were the 2020 current, quick, and debt ratios, all of which failed to meet the
contractual limits of 2.0, 1.0, and 55 percent, respectively. Technically, the bank had a legal right to
call for immediate repayment of both the long- and short-term loans, and, if they were not repaid
within ten days, could force the company into bankruptcy. However, SRM had been a good client of
MCNB for many years, had never missed a payment when it was due, and had a reputation of
unquestioned integrity in its business dealings.

The recession that had been plaguing the nation's farm economy at least since the start of the 2000s
had caused severe, though mostly temporary; problems for agricultural suppliers like SRM who
depended on farmers for roughly 45 to 50 percent of total sales. On top of this, disastrous freezes for
two straight winters had devastated Florida's citrus and vegetable industries. The drastic curtailment of
demand for new grove trailers and citrus transport carriers had hit SRM particularly hard. In spite of
these adverse developments, though, 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 were very sensitive to the
issue of problem loans. The recent spate of bank failures and the ensuing loss of public trust caused by

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the adverse publicity had forced regulators to become more strict in their examination of bank loan
portfolios and lending practices, and to demand earlier identification of potential repayment problems.
SRM's Altman Z factor, 2.88 for 2020, was below 2.99 threshold used to distinguish firms with little
likelihood of bankruptcy in the next two years from those with less attractive prospects. Because of
this deficiency, MCNB would be under increased pressure from the regulators to reclassify the loans
into the "problem" category and take whatever steps were needed to collect the monies due and reduce
the bank's exposure as quickly as practicable. To justify a vote against reclassification of the loans as
"problems," the Senior Loan Committee would require strong and convincing evidence that Silver
River Manufacturing Company's present difficulties were temporary in nature, that appropriate actions
designed to overcome them had been taken, and that the chance for success in reversing the trends was
realistically good. The task of collecting the necessary information, evaluating its implications, and
preparing recommendations for action by the full Senior Loan Committee fell on the shoulders of Lesa
Nix.
Table 1: Silver River Manufacturing Company
Balance Sheets for the Year Ending December 31 (Thousands of US Dollars)
Liabilities and Equities 2018 2019 2020 Assets 2018 2019 2020
Short-term bank loans 3,825 6,120 21,879 Cash 6,178 4,803 4,687
Accounts payable 8,117 12,607 23,998 Receivables 20,517 22,154 35,228
Accruals 4,131 6,120 8,798 Inventories 22,721 39,635 55,990

Total current liabilities 16,073 24,847 54,675 Total current assets 49,416 66,592 95,906

Long-term bank loan 7,650 11,475 11,475

Mortgage 3,443 3,121 2,808
Long-term debt 11,093 14,596 14,283
Total liabilities 27,165 39,443 68,957 Land, bldg, plt & equip. 21,313 24,120 27,448
Common stock 27,923 27,923 27,923 Less depreciation (3,596) (5,585) (8,033)
Retained earnings 12,045 17,762 18,441 Net fixed assets 17,717 18,536 19,416
Owners' equity 39,968 45,685 46,364

Total liabilities and equity 67,133 85,128 115,321 Total assets 67,133 85,128 115,321
Notes:
a) Market price of shares - 2018: $17.79; 2019: $9.69; 2020: $1.02.
b) Price earnings (PE) ratios: 2018:6.6,2019: 5.3, 2020:4.6.
c) Assume that all changes in interest-bearing loans and gross fixed assets occur at the start of the relevant
years.
d) The mortgage loan is secured by a first mortgage bond on land and buildings.

Silver River Manufacturing Company, whose stock is traded over the counter, is a large regional
producer of farm and utility trailers, specialized livestock carriers, and mobile home chassis. More
than 85 percent of SRM's sales come from the southeastern part of the Unites States, although a
growing market for custom horse transport vans designed and produced by SRM is developing
nationally and even internationally. Likewise, several major boat companies in Florida work closely
with SRM in designing trailers for their new offerings, and these boat-trailer "packages" are sold
through the nationwide dealer networks of the boat companies. With few exceptions, the products
manufactured by SRM are not subject to technological obsolescence or to deterioration, and in those
instances where technology is a factor to be considered, SRM holds several patents with which it can
partially offset some of the risks.

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 Table 2: Silver River Manufacturing Company
Income Statement for the year ending December 31
Thousands of Dollars
Particulars 2018 2019 2020
Net Sales 205,197 221,590 234,878
Cost of goods sold 162,321 180,157 199,971
Gross profit 42,876 41,432 34,907
Admn. & selling 15,348 18,414 20,257
Depreciation 1,913 1,989 2,448
Misc expenses 2,433 4,269 6,870
Total operating expenses 19,693 24,671 29,575
EBIT 23,182 16,761 5,332
Interest on STLoan 383 673 2,188
Interest on LT loan 765 1,148 1,148
Interest on mortgage 312 283 254
Earnings before taxes (EBT) 21,723 14,658 1,742
Taxes @ 0.48 percent 10,427 7,036 836
Net income 11,296 7,622 906
Dividend on stock 2,824 1,906 227
Addition to retained earnings 8,472 5,717 680
Notes:
a) Earnings per share (EPS)- 2018: $2.7; 2019: $1.83; 2020: $0.22.
b) Interest rates on borrowed funds:
Short-term loans - 2018: 10%; 2019: 11%; 2020: 10%
Long-term loan: 10% for each year.
Mortgage: 9.0575% for each year.
c) For purposes of this case, assume that expenses other than depreciation and interest are all variable with
sales.
d) The industry average dividend payout ratio is provided as 20 percent.

Table 3: Silver River Manufacturing Company

Changes in Equity Accounts Year Ended December 31 (Thousands of Dollars)
Particulars 2018 2019 2020
Beginning retained earnings 3,573 12,045 17,762
Add net income after taxes 11,296 7,622 906
Subtract dividends on stock 2,824 1,906 227
Ending retained earnings 12,045 17,762 18,441

In the decade prior to 2018, SRM had experienced high and relatively steady growth in sales, assets,
and profits. Toward the end of 2018, the demand for new field trailers in the citrus and vegetable
industries started to fall off. White had recently attended an executive development seminar on market
penetration and profitability, and he was convinced that the key to sustained profits and superior
market performance was sales growth and the achievement of a high share of the market.
Consequently, in the light of the softening demand, White aggressively reduced prices to stimulate
further sales. This, he believed, would allow him to realize greater economies of scale in production
and to ride the learning or experience curve down to a lower cost position. He had full confidence that
national economic policies would revive the ailing farm sector, so the downturn in demand would only
be a short-term problem. Consequently, production continued unabated and inventories started to
increase. 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. Sales growth did remain high through the

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third quarter of 2020, but inventories also increased steadily and, particularly in 2020, accounts
receivable shot up dramatically.

Table 4: Silver River Manufacturing Company

Common Size Balance Sheets Year Ended December 31 (Percent of Total Assets)
Liabilities and Equities 2018 2019 2020 Assets 2018 2019 2020
Short-term bank loans 5.70 7.19 18.97 Cash 9.20 5.64 4.06
Accounts payable 12.09 14.81 20.81 Receivables 30.56 26.02 30.55
Accruals 6.15 7.19 7.63 Inventories 33.84 46.56 48.55

Total current liabilities 23.94 29.19 47.41 Total current assets 73.61 78.23 83.16

Long-term bank loan 11.40 13.48 9.95

Mortgage 5.13 3.67 2.43
Long-term debt 16.52 17.15 12.39 -
Total liabilities 40.46 46.33 59.80 Land, bldg, plt & equip. 31.75 28.33 23.80
Common stock 41.59 32.80 24.21 Less depreciation (5.36) (6.56) (6.97)
Retained earnings 17.94 20.86 15.99 Net fixed assets 26.39 21.77 16.84
Owners' equity 59.54 53.67 40.20

Total liabilities and equity 100 100 100 Total assets 100 100 100

Table 5: Silver River Manufacturing Company

Common Size Income Statements Year Ended December 31 (Percent of Net Sales)
Particulars 2018 2019 2020
Net Sales 100.00 100.00 100.00
Cost of goods sold 79.11 81.30 85.14
Gross profit 20.89 18.70 14.86
Admn. & selling 7.48 8.31 8.62
Depreciation 0.93 0.90 1.04
Misc expenses 1.19 1.93 2.92
Total operating expenses 9.60 11.13 12.59
EBIT 11.30 7.56 2.27
Interest on STLoan 0.19 0.30 0.93
Interest on LT loan 0.37 0.52 0.49
Interest on mortgage 0.15 0.13 0.11
Earnings before taxes (EBT) 10.59 6.61 0.74
Taxes @ 48% 0.48 percent 5.08 3.18 0.36
Net income 5.50 3.44 0.39
Dividend on stock 1.38 0.86 0.10
Addition to retained earnings 4.13 2.58 0.29

To finance these increases in assets, SRM turned to Marion County National Bank for a long-term
loan in 2019 and increases in its short-term credit lines in both 2019 and 2020. Even this was
insufficient to cover the aggressive expansion on the asset side, so White started to delay payment of
his accounts payable until the second late notice was received. He realized that this was not a
particularly wise decision for the long run, but he still did not think it would be necessary to follow the
policy for too long. The summer vegetable crop looked like a record breaker, and it was unlikely that a
severe freeze would destroy the winter crop three years in a row. Also, some of the orange groves in
the northern part of Central Florida that were killed by the freeze were being converted to vegetable
and grain production, so White was optimistic that the orderly markets of the past would soon
reappear.
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 Table 6: Silver River Manufacturing Company
Statement of Changes in Financial Position Year Ended December 31 (Thousands of Dollars)
Particulars 2,019 2,020
Sources of funds
Net income after taxes 7,622 ?
Depreciation 1,989 ?
Funds from operations 9,611 ?
Long-term loan 3,825 ?
Net decrease in working capital
Total sources 13,436 ?
Application of funds
Mortgage change 321 ?
Fixed assets change 2,808 ?
Dividends on stock 1,906 ?
Net increase in working capital 8,402 ?
Total uses 13,436 ?

Analysis of changes in working capital 2,019 2,020

Increase (decrease) in current assets
Cash change (1,375) ?
AR change 1,637 ?
INV change 16,914 ?
CA change 17,176 ?
Increase (decrease) in current liabilities
NP change 2,295 ?
AP change 4,491 ?
ACC change 1,989 ?
CL change 8,775 ?
Net increase (decrease) in working capital 8,402 ?

After Lesa Nix's telephone call and the subsequent receipt of a copy of the bank's financial analysis of
SRM, White realized for the first time just how precarious the company's financial position was. He
had always taken it for granted that MCNB would increase his line of credit as required so long as he
made his payments on time. Now, when the credit lines were needed more than ever, the bank was
seriously considering reducing - or even eliminating - them. His persistent over-optimism that good
times were always just around the corner had clouded his thinking and caused him to forget about the
implications for the company if his market forecasts were wrong. Hence, White had postponed making
the "hard decisions" involving cutbacks, hoping that in the end it would not be necessary to make them
at all. It also dawned on him that sales growth and high market share per se might not be the whole
answer to the question of sustained long-run profitability. "If you cut prices to where you are losing
money on every sale, you won't make it up on volume. The strategy of high sales growth and market
share can work only when it is possible to preserve reasonable profit margins at the same time. Failure
to do just that is what got us in trouble."

Nix's phone call certainly had the intended effect and got Greg White's attention. As he started to
investigate what could be done to correct the current problems, he realized that they were even more
serious than the bank imagined. He had recently signed a contract for a plant expansion that would
require another $7,650,000 of capital during the first quarter of 2021. He had planned to obtain this
money by a short-term loan from MCNB to be repaid from profits generated in the first half of 2021

5
by the expansion. The new facilities would enhance the production capabilities in the very lucrative
area of custom horse vans. Marion County is the center of the Florida thoroughbred and Arabian horse
industry, and the demand for better equipment is almost recession-proof. Hence, any plans for turning
around Silver River Manufacturing Company would depend heavily on moving toward this market
segment and away from traditional agriculture. But $7,650,000 of new capital is required before that
goal can be reached.
Table 7: Silver River Manufacturing Company
Ratio Analysis Year Ended December 31
Particulars 2018 2019 2020 Industry
average
Liquidity ratios
Current ratio 3.07 2.68 2.50
Quick ratio 1.66 1.08 1.00

Leverage ratios
Debt ratio (%) 40.46 46.33 50.00
Times interest earned 15.89 7.97 7.70

Asset management ratios

Inventory turnover (Cost)a 7.14 4.55 5.70
Inventory turnover (Selling)b 9.03 5.59 7.00
Fixed asset turnover 11.58 11.95 12.00
Total asset turnover 3.06 2.60 3.00
Average collection period 36.00 35.99 32.00

Profitability ratios
Profit margin (%) 5.50 3.44 2.90
Gross profit margin (%) 20.89 18.70 18.00
Return on total assets 16.83 8.95 8.80
Return on owners' equity 28.26 16.68 17.50

Potential failure indicator

Altman Z factorc ? ? 1.81/2.99
Notes:
a) Uses cost of goods sold as the numerator.
b) Uses net sales as the numerator.
c) The Altman Z factor range of 1.81 - 2.99 represents the so-called "zone of ignorance."
d) Year-end balance sheet values were used throughout in the computation of ratios embodying balance
sheet items.
e) Assume constant industry - average ratios throughout the period 2018 - 2022.

White realizes that he has focused too much attention on marketing and production issues without
paying adequate heed to their financial implications. He is confident, though, that SRM's basic
business operations are sound. Hence, the company's financial position can be improved significantly
over the next two years if the bank is willing to maintain and even increase the credit lines. This view
is bolstered by the fact that the company is in the middle of a major reorientation of the production
mix away from the highly volatile farm sector and toward the more stable medium-to-high growth
markets. As shown in the top half of Table 8, 50 percent of SRM's expected sales during 2021 are in
the declining or slow growth areas of the total trailer market. Once the new production facility goes
online, the company will be able to increase output in the rapidly growing (and particularly profitable)
horse van and mobile home chassis segments of the market, thereby reducing its dependency on farm
and light utility trailer sales to 35 percent or less.

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 Table 8: Silver River Manufacturing Company
Analysis of sales mix and market potential
Market segments trailer fabrication 2021 Growth SRM sales SRM Weighted
industry forecast proportion 2021 average sales
growth
Farm trailers -10.0% x 40% = -4.00%
Horse vans 25.0% x 15% = 3.75%
Mobile home chassis 20.0% x 20% = 4.00%
Boat trailers 10.0% x 15% = 1.50%
Light utility & miscellaneous 7.5% x 10% = 0.75%
Weighted average sales growth 6.00%

Market segments trailer fabrication 2022 Growth SRM sales SRM Weighted
industry forecast proportion 2022 average sales
growth
Farm trailers -10% x 30% = -3.00%
Horse vans 25% x 25% = 6.25%
Mobile home chassis 15% x 25% = 3.75%
Boat trailers 15% x 15% = 2.25%
Light utility & miscellaneous 5% x 5% = 0.25%
Weighted average sales growth 9.50%
Note: ‘SRM weighted average sales growth’ is the sum of the product of growth forecast and SRM sales
proportion. Note that column 4 is equal to the product of the column 2 and column 3. The 2022 sales growth
rate would be applied on 2021 sales.

The forecasts of market segment growth rates and the sales mix proportions for 2021 and 2022 given
in Table 8 reflect Greg White's analysis of conditions over the next two years assuming there are no
significant improvements in either the national or the farm economy. Also, it is assumed that SRM
will change its policy of aggressive marketing and sales promotion and return to full-margin pricing,
standard industry credit terms, and tighter credit standards. These changes should enable the company
to reduce the level of cost of goods sold from over 85 percent of sales in 2020 to about 82.5 percent in
2021 and 80 percent in 2022. Similarly, White expects to be able to reduce administrative and selling
expenses from almost 9 percent of sales to 8 percent in 2021 and to 7.5 percent in 2022. Significant
cuts will also be made in miscellaneous expenses to reduce them roughly to 1.75 percent and 1.25
percent of sales in 2021 and 2022, respectively. Average collection period and inventory turnover will
be maintained at average industry level. These changes represent "trimming the fat" and should not
influence the quality of the firm's products or the level of nonprice promotional activity. White would
like to make the reductions immediately instead of spreading them over two years, but contractual
provisions with certain sales and maintenance groups reduce his flexibility to act. To appease
suppliers, future bills will be paid more promptly, and to show goodwill toward the bank, common
stock dividends will be eliminated until the past strong financial position of the firm is restored.

White has asked you, his assistant, to verify the bank's evaluation of the company's current financial
situation and to put together a forecast of SRM's expected performance for 2021 - 2022. He instructs
you to ignore the possibility of a reduction in the credit lines, and to assume that the bank will be
willing to increase them by the $7,650,000 needed to complete the expansion and provide working
capital support to the new operation. He does not expect the level of interest rates to change
substantially over the two-year period, and assumed 48 percent combined federal and state tax rate
should also hold for two years. However, he expects that MCNB will charge 16 percent for the short-
term loan. Finally, if the bank cooperates, and if he is able to effect the turnaround of SRM, White
expects the capital markets to recognize the success by increasing the earnings multiple (P/E ratio) to

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5.5 in 2021 and to 6.5 in 2022. The firm has a system of maintaining minimum cash balance to the
tune of 5 percent of sales.

QUESTIONS

1.(a) Prepare a statement of changes in financial position for 2020 (sources and uses of funds
statement) or complete Table 6.

(b) Calculate SRM's key financial ratios for 2020 and compare them with those of 2018, 2019,
industry average, and contract requirement or complete Table 7.

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.)

3. If the bank were to maintain the present credit lines and grant an additional $7,650,000 short-term
loan at a 16 percent rate of interest effective from January 1, 2021, would the company be able to
retire all short-term loans existing on December 31, 2021? (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 percent. Assume that SRM pays no cash dividends during
the year.) Complete tables 9 and 10 included as worksheets to facilitate analysis.

4. Compute projected financial ratios for 2021 and 2022 (or complete Table 11). Compare these ratios
with 2020 along with industry averages and analyze improvement or deterioration in financial
condition.

5. If all short-term bank loans are repaid towards the end of the first half of 2021, do you think that
company is still able to pay regular dividend and maintain minimum cash balance. Revise the tables
9, 10 and 11 (or complete the tables 12, 13 and 14). Do you find any situations developing that may
indicate poor financial policy? What would be the impact of such situations on the ratios for the
company, and are such impacts necessarily either good or bad? Why?

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 $7,650,000 loan, 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?

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?

8. Explain some of the lessons learnt from the case.

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 Table 9: Silver River Manufacturing Company
Pro Forma Income Statements (Projected)
(Thousands of Dollars)
Particulars 2,020 2,021 2,022
Projected Projected
Net Sales 234,878 - -
Cost of goods sold 199,971 - -
Gross profit 34,907 - -
Admn. & selling 20,257 - -
Depreciation 2,448 2,907 2,189
Misc expenses 6,870 - -
Total operating expenses 29,575
EBIT 5,332
Interest on STLoan 2,188 4,725 4,725
Interest on LT loan 1,148 1,148 1,148
Interest on mortgage 254 229 206
Earnings before taxes (EBT) 1,742
Taxes @ 0.48 836
Net income 906
Dividend on stock 0.25 227
Addition to retained earnings 680

Table 10: Silver River Manufacturing Company

Pro Forma Balance Sheets (Projected)
(Thousands of Dollars)

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 Assets 2,020 2,021 2,022
Proj Proj
Cash 4,687
Receivables 35,228
Inventories 55,990
Total current assets 95,906
Land, bldg, plt & equip. 27,448 35,098 36,151
Less depreciation (8,033) (10,940) (10,939)
Net fixed as sets 19,416 24,159 25,212
Total assets 115,321

Liabilities and Equities 2,020 2,021 2,022

Proj Proj
Short-term bank loans 21,879 29,529 29,529
Accounts payable 23,998 19,194 20,154
Accruals 8,798 11,161 13,952
Total current liabilities 54,675 59,884 63,634
Long-term bank loan 11,475 11,475 11,475
Mortgage 2,808 2,525 2,273
Long-term debt 14,283 14,000 13,748
Total liabilities 68,957 73,884 77,382
Common stock 27,923 27,923 27,923
Retained earnings 18,441
Owners' equity 46,364
Total liabilities and equity 115,321

Table 11: Silver River Manufacturing Company

Ratio Analysis Year Ended December 31 (Projected)
Particulars 2020 2021 2022 Industry
Projected Projected average
Liquidity ratios
Current ratio 2.50
Quick ratio 1.00

Leverage ratios
Debt ratio (%) 50.00
Times interest earned 7.70

Asset management ratios

Inventory turnover (Cost)a 5.70
Inventory turnover (Selling)b 7.00
Fixed asset turnover 12.00
Total asset turnover 3.00
Average collection period 32.00

Profitability ratios
Profit margin (%) 2.90
Gross profit margin (%) 18.00
Return on total assets 8.80
Return on owners' equity 17.50

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 Table 12: Silver River Manufacturing Company
Pro Forma Income Statements (Revised)
(Thousands of Dollars)
Particulars 2,020 2,021 2,022
Revised Revised
Net Sales 234,878 - -
Cost of goods sold 199,971 - -
Gross profit 34,907 - -
Admn. & selling 20,257 - -
Depreciation 2,448 2,907 2,189
Misc expenses 6,870 - -
Total operating expenses 29,575
EBIT 5,332
Interest on STLoan 2,188 2,362 2,362
Interest on LT loan 1,148 1,148 1,148
Interest on mortgage 254 229 206
Earnings before taxes (EBT) 1,742
Taxes @ 0.48 836
Net income 906
Dividend on stock 0.25 227
Addition to retained earnings 680

Table 13: Silver River Manufacturing Company

Pro Forma Balance Sheets (Revised)
(Thousands of Dollars)

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 Assets 2020 2021 2022
Revised Revised
Cash 4,687
Receivables 35,228 - -
Inventories 55,990 - -
Total current assets 95,906
Land, bldg, plt & equip. 27,448 35,098 36,151
Less depreciation (8,033) (10,940) (13,127)
Net fixed assets 19,416 24,159 23,024
Total assets 115,321

Liabilities and Equities 2020 2021 2022

Revised Revised
Short-term bank loans 21,879 0 0
Accounts payable 23,998 19,194 20,154
Accruals 8,798 11,161 13,952
Total current liabilities 54,675 30,355 34,105
Long-term bank loan 11,475 11,475 11,475
Mortgage 2,808 2,525 2,273
Long-term debt 14,283 14,000 13,748
Total liabilities 68,957 44,355 47,853
Common stock 27,923 27,923 27,923
Retained earnings 18,441
Owners' equity 46,364
Total liabilities and equity 115,321

Table 14: Silver River Manufacturing Company

Ratio Analysis Year Ended December 31 (Revised)
Particulars 2020 2021 Revised 2022 Revised Industry
average
Liquidity ratios
Current ratio 2.50
Quick ratio 1.00

Leverage ratios
Debt ratio (%) 50.00
Times interest earned 7.70

Asset management ratios

Inventory turnover (Cost)a 5.70
Inventory turnover (Selling)b 7.00
Fixed asset turnover 12.00
Total asset turnover 3.00
Average collection period 32.00

Profitability ratios
Profit margin (%) 2.90
Gross profit margin (%) 18.00
Return on total assets 8.80
Return on owners' equity 17.50
Xxx

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 Silver River Manufacturing Company

1. Each student is expected to read the case thoroughly and address the issues, although the case
is a group work.

2. The case analysis can be completed in-groups.

3. A group report on the analysis of the case should be submitted to the Faculty before
presentation. A late submission is subject to deduction in marks. The report should contain
general introduction to the case, and analysis of each issue, followed by conclusions and
lessons learnt. The report should also contain calculations, formula, graphs, analysis, and
interpretations.

4. Each group should give presentation on the case in about 20 to 30 minutes. Each student
should actively participate in the presentation failing which marks would be deducted.

5. Marks distribution for evaluation will be as under:

Particulars Marks
General background 4
Issue 1a: Sources & uses 4
Issue 1b: Computation of ratios & analysis 4
Issue 2. Analysis of strengths & weakness 4
Du Pont analysis 4
Altman’s z score 4
Issue 3.Tables 9 & 10: Projection of fin. statements 2021 & 2022 & analysis. 8
Issue 4: Table 11: Projection of fin. ratios 2021 & 2022 & analysis. 4
Issue 5: Table 12: Revision of income statements & analysis. 4
Table 13: Revision of balance sheet & analysis 4
Table 14: Revision of fin. ratios & analysis 4
Issue 6: Decision based on reasons. 4
Issue 7: Alternatives 4
Presentation 20
Overall report quality 20
Lessons learnt 4
Total 100

6. Presentation will be evaluated in terms of number of issues dealt with, style, participation by
all members, ability to attract the audience, quality of slides/transparencies, and how the
presentation has been well-organized among the members of the group.

7. If the report is copied, it is subject to deduction of marks. The Faculty may ask questions to a
particular student or may administer the quiz.

8. Feedback will be provided by the Faculty at the end of the presentation.

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