Silver River Case Analysis

CASE ANALYSIS
ON
SILVER RIVER MANUFACTURING COMPANY
Submitted to:
Prof. Dr. Radhe Shyam Pradhan
Academic Director of Uniglobe College
Submitted by:
Buddhi Raj Tamang
Chanda Kumari Gupta
Dhan Kumari Lama
Drispa Kunwar
Ishu Shah
Jharana Regmi
Joshila Dahal
Kalpana Joshi
Uniglobe College
Kathmandu, Nepal
July 26, 2022
DECLARATION
This is to certify that we have completed the summer project “Case Analysis on Silver River
Manufacturing Company” under the guidance of “Dr. Radhe Shyam Pradhan” in partial
fulfillment of the requirements for the degree of Masters of Business Administration
(FINANCE) at Faculty of management, Pokhara University. This is our original work and we
have not submitted it earlier elsewhere.
Date: July 26, 2022
i
CERTIFICATE FROM THE SUPERVISOR
This is to certify that the summer project entitled “Case Analysis on Silver River Manufacturing
Company” by “Buddhi Raj Tamang, Chanda Gupta, Dhan Kumari Lama, Drispa Kunwar, Ishu
Shah, Jharana Regmi, Joshila Dahal, Kalpana Joshi” submitted in the partial fulfillment of the
requirements for the degree of Masters of Business Administration at Faculty of Management,
Pokhara University under my guidance and supervision. To the best of my knowledge, the
information presented by them in the summer project report has not been submitted earlier.
…………………………………
Dr. Radhe Shyam Pradhan
Supervisor
ii
ACKNOWLEDGEMENTS
We are grateful to Pokhara University for providing us the opportunity of preparing the report on
the topic, “Case Analysis on Silver River Manufacturing Company” as it has provided us a great
exposure to real life business environment. We are as well very much thankful to the college, and
our respected Program coordinator, Mr. Diwakar Bist, for providing us the necessary help and
encouragement to carry out this project.
We are also very much grateful to our supervisor and our mentor, Prof. Dr. Radhe Shyam
Pradhan, whose expertise, understanding, generous guidance and support made it possible for us
to work on a topic that was of great interest to us.
Lastly, we would like to thank the people of our subject area who helped us to collect the data and
supported us by providing the relevant data. We owe our depth of gratitude to all those who
directly or indirectly helped us to complete this project.
Thank you.
iii
TABLE OF CONTENTS
DECLARATION..............................................................................................................................i
CERTIFICATE FROM THE SUPERVISOR..............................................................................ii
ACKNOWLEDGEMENTS...........................................................................................................iii
TABLE OF CONTENTS...............................................................................................................iv
LIST OF TABLES...........................................................................................................................v
LIST OF FIGURES........................................................................................................................vi
ACRONYMS................................................................................................................................viii
General Background..........................................................................................................................1
ISSUE 1(A)........................................................................................................................................3
ISSUE 1(B)........................................................................................................................................7
ISSUE 2...........................................................................................................................................22
ISSUE 3...........................................................................................................................................32
ISSUE 4...........................................................................................................................................36
Interpretations..................................................................................................................................43
Liquidity ratio..................................................................................................................................44
ISSUE 5...........................................................................................................................................57
ISSUE 6...........................................................................................................................................77
ISSUE 7...........................................................................................................................................79
ISSUE 8...........................................................................................................................................81
Conclusion.......................................................................................................................................83
Reference........................................................................................................................................85
iv
LIST OF TABLES
Table 1: Statement of changes in Financial Position of..................................................................4

Table 2: Ratio Analysis...................................................................................................................7
Table 1: Calculation of ROE.........................................................................................................23
Table 4: Calculation of Altman Z-score........................................................................................26
Table 5: Silver River Manufacturing Company............................................................................32
Table 8: The Du Pont Analysis......................................................................................................37
Table 9: Projected Altman Z score................................................................................................39
Table 10: Silver Manufacturing Company....................................................................................57
Table 13: Revised Du Pont Analysis.............................................................................................71
Table 14: Projected Altman Z score..............................................................................................73
v
LIST OF FIGURES
Figure 1: Current ratio.....................................................................................................................9

Figure 2: Quick ratio......................................................................................................................10
Figure 3: Debt ratio........................................................................................................................11
Figure 4: Time Interest Earned......................................................................................................12
Figure 5: Inventory Turnover Ratio (COGS)................................................................................13
Figure 6: Inventory Turnover Ratio...............................................................................................14
Figure 7: Fixed Assets Turnover Ratio..........................................................................................15
Figure 8: Total Assets Turnover Ratio..........................................................................................16
Figure 9: Average Collection Period.............................................................................................17
Figure 10: Net Profit Margin.........................................................................................................18
Figure 11: Gross profit Margin......................................................................................................19
Figure 12: Return on Total Assets.................................................................................................20
Figure 13: Return on Equity..........................................................................................................21
Figure 14: Return on equity...........................................................................................................24
Figure15: Altman Z-score..............................................................................................................29
Figure 16: Return on Equity..........................................................................................................38
Figure 17: Projected Altman Z score.............................................................................................42
Figure 18: Projected Current ratio.................................................................................................50
Figure 19: Projected Quick Ratio.................................................................................................50
Figure 20: Projected Debt Ratio....................................................................................................51
Figure 21: Projected time interest earned ratio..............................................................................51
Figure 22: Projected inventory turnover ratio (COGS).................................................................52
Figure 23: Projected inventory turnover ratio (sales)....................................................................52
Figure 24: Projected fixed assets turnover ratio...........................................................................53
Figure 25: Projected total assets turnover ratio.............................................................................53
Figure 26: Projected Average collection period............................................................................54
Figure 27: Projected net profit margin...........................................................................................54
Figure 28: Projected gross profit margin.......................................................................................55
Figure 29: Projected return on total assets.....................................................................................55
vi
Figure 30: Projected return on equity............................................................................................56
Figure 31: Revised current ratio....................................................................................................65
Figure 32: Revised quick ratio......................................................................................................65
Figure 33: Revised debt ratio.........................................................................................................66
Figure 34: Revised time interest earned ratio................................................................................66
Figure 35: Revised inventory turnover ratio..................................................................................67
Figure 36: Revised fixed assets turnover ratio..............................................................................67
Figure 37: Revised assets turnover ratio........................................................................................68
Figure 39: Revised Net Profit Margin...........................................................................................69
Figure 40: revised gross profit margin...........................................................................................69
Figure 41: revised return on total assets........................................................................................70
Figure 42: revised return on owner’s equity..................................................................................70
Figure 43: Revised Return on Equity............................................................................................72
Figure 44: Revised Altman z score...............................................................................................76
vii
ACRONYMS
SRM- Silver River Manufacturing

MCNB- Marion County National Bank
CA- Current Assets
CL- Current Liabilities
ITR- Inventory Turnover Ratio
NPM- Net Profit Margin
ROA-Return on Assets
ROE- Return on Owner’s Equity
EM- Equity Multiplier
ACP- Average Collection Period
EQUIP- Equipment
EBIT- Earning Before Interest and Taxes
EBT- Earning Before Taxes
ST- Short Term
LT- Long Term
viii
General Background
Mr. Greg White is the owner of the sizable listed regional producer known as Silver River
Manufacturing Company (SRM). It creates mobile house chassis, specialty animal carriers, and
agricultural and utility trailers. Farmers and boat manufacturers make up the two main markets
now in existence. Agriculturists account for 45 to 50 percent of this supplier's total revenues.
Southeast US accounts for more than 85% of SRM's sales. Additionally, there is an increasing
domestic and international market for custom horse transport trucks. SRM is a significant client
of Marion Country National Bank (MCNB). The nation's farm economy was plagued by a
recession in 2010. The farmer's total sales drop by about 45 percent to 50 percent. It caused
difficulties for Silver River Manufacturing Company. On top of that, a disastrous freeze for two
consecutive winters had largely destroyed Florida's citrus and vegetable industries. Similarly,
several major boat companies in Florida collaborate closely with SRM in designing trailers for
their new offerings, and these boat-trailer "packages" are sold through the boat companies'
nationwide dealer networks. With few exceptions, SRM's products are not subject to
technological obsolescence or deterioration, and in those cases where technology is a factor to be
considered, SRM holds several patents that allow it to mitigate some of the risks. Marion County
National Bank (MCNB) is SRM's official banker, and it has approved both short and long-term
credit facilities. SRM was deemed financially sound and efficiently managed by MCNB. SRM
experienced rapid growth in sales, assets, and profits in the decade preceding 2018, and by the
end of 2018, In the citrus and vegetable industries, demand for new field trailers has begun to
decline. Mr. White aggressively lowers prices in order to stimulate additional sales and reduce
the ever-expanding inventories.
SRM is also a component of the integrated market penetration strategy, offering more favorable
credit terms and a more relaxed credit standard. Sales remained strong through the third quarter
of 2020, but inventories rose steadily, particularly in 2020, and accounts receivable increased
dramatically. SRM turned to Marion County National Bank for a long-term loan in 2019 and
increased its short-term credit lines in both 2019 and 2020 to finance these asset increases.
Financial statement analysis of SRM 2020 current, quick, and debt ratios, which all fall short of
the contractual limits of 2.0, 1.0, and 55%, respectively. If both long and short-term loans are not
repaid within 10 days, the bank may force the company to liquidate its assets. SRM, on the other
1
hand, had been a SRM, on the other hand, had been a long-term client of MCNB, had never
missed a payment when it was due, and had a reputation for unquestionable integrity in its
business dealings. Even so, it was insufficient to cover the aggressive asset expansion. As a
result, Greg White, who had always made prompt payments, began to delay payments. As a
result, account payables and other short-term loans increased significantly. SRM recognized that
this was not a particularly wise decision in the long run, but he did not believe that it would be
necessary to adhere to the policy for an extended period of time. Regulators increased their
pressure on MNCB to reclassify SRM's loan as "problem category" and take whatever steps were
necessary to collect the money owed and reduce the bank's exposure as soon as possible. To
avoid reclassification, SRM needed strong and convincing evidence that its problems were only
temporary and that it had a good chance of reversing the trend. Mr. White's current financial
problems were not his only issue. He just agreed to a deal for a factory expansion that will cost
an additional $6,000,000 in the first quarter of 2021. He had intended to borrow this money from
MCNB for a brief period of time, with the repayment to come from the expansion's first-half
revenue. The brand-new facilities would increase the capacity for production in the highly
lucrative field of customized horse vehicles. If the bank is ready to preserve and even raise the
credit lines, Mr. White is pretty sure that the company's financial situation can be greatly
improved over the course of the following two years. The company will be able to enhance
output in the quickly expanding and extremely lucrative horse van and mobile home chassis
segments of the market once the new production facility is operational, reducing its dependence
on farm and light utility trailer sales to 35 percent or less. In the event that neither the national
economy nor the farm economy significantly improves over the next two years, Greg White's
analysis of the situation will be used. Additionally, he predicted that SRM will abandon its
aggressive marketing and sales promotion strategy and return to full margin pricing, typical
industry loan terms, and stricter credit criteria. These changes enable the company to reduce its
cost of goods sold from more than 85% of sales in 2020 to approximately 82.5 percent in 2021
and 80% in 2022.
White anticipates being able to lower selling and administrative costs from approximately 9
percent of sales to 8 percent in 2021 and to 7.5 percent in 2022. Miscellaneous costs will also be
reduced, roughly bringing them to 1.75 percent of revenues in 2021 and 1.25 percent in 2022.
The industry standard for collection times and inventory turnover shall be upheld. These
2
adjustments are "trimming the fat" and shouldn't have an impact on the standard of the
company's goods or the volume of non-price promotional activity. Because of contractual
obligations with specific sales and maintenance groups, White chose to implement the cutbacks
right away rather than over the course of two years. However, this decision limits his options.
Future payments will be made more quickly to please suppliers, and in an effort to win over the
bank, common stock dividends will be stopped until the company's prior sound financial
standing has been restored. We must evaluate SRM's eligibility for the bank loan based on the
financial information presented in the case and forecasted in the income statement and balance
sheet. The decision now is whether the bank should continue to service the current short- and
long-term loans or should demand their immediate payback. Additionally, we must outline
SRM's options in the event that the bank decides to close the entire line of credit and demand
immediate payback of the two outstanding loans. He gave instructions to disregard the prospect
of a decrease in the credit lines and to proceed under the assumption that the bank will be willing
to expand them by the $6,000,000 required to complete the expansion and provide working
capital support to the new company. He estimated the 48 percent combined federal and state tax
rate should stay for two years and does not anticipate the level of interest rates to vary
significantly over the two-year timeframe. He does anticipate that MCNB will impose a 16
percent fee for the short-term loan, though. Finally, White anticipates that the capital markets
will acknowledge the performance by raising the earnings multiple (P/E ratio) to 5.5 in 2021 and
to 6.5 in 2022 if the bank cooperates and if he is successful in bringing about the turnaround of
SRM. The company has a policy of maintaining a minimum cash level equal to 5% of sales.
ISSUE 1(A)
Prepare the statement of changes in financial position for 2020(source and uses of funds
Statements) or complete Table 6.
Solution:
The statement of changes in financial position is put together in order to evaluate the changes in
the company from year ended on December 31, 2019 to 2020. The statement of changes in
financial position looks at the three main business activities that provide or use cash:
 Operating (including sales, inventories, accounts receivable and accounts payable)
3
 Investing (including buying and selling assets/ equipment)
 Financing (including selling common shares and paying off debt)
Mr. White is worried that he has focused too much attention on marketing and production issues
without paying adequate heed to their financial implications. So, we look at the statement of
changes in financial position for the two years to assess the financial position.
Here we look at the sources of funds and application of funds for the purpose of financial
evaluation. The following shows the financial statement that shows the source and the use of
funds of the organization.
Table 1: Statement of changes in Financial Position of
Silver River Manufacturing Company.
Year Ended December 31
(thousands of dollars)
Particulars 2019 2020

Sources of Funds
Net income after taxes 7535 873
Depreciation 1657 2040
Funds from operations 9192 2913
Long-term loan 3188 0
Net decrease in working capital 340
Total sources 12380 3253
Application of funds
Mortgage change 269 260
Fixed assets change 2340 2774
Dividends on stock 1884 218
Net increase in working capital 7886 0
Total uses 12379 3252
However, the analysis statement of changes in financial position alone is not enough to correctly
assess the financial position of the company. So, we also look at the analysis of changes in
working capital of the company for year ended December 31,2019 and 2020.
4
A change in working capital is the difference in the net working capital amount from one
accounting period to the next. A management goal is to reduce any upward changes in
working capital, thereby minimizing the need to acquire additional funding. Net working
capital is defined as current assets minus current liabilities.
Mr. Greg White is confident that SRM’s business operations are sound. In order to evaluate the
truth in his claim and for our own assessment we prepare the following table showing changes in
working capital.
Analysis of changes in working capital:
Increase (decrease) in current assets

Cash change (1146) (97)
AR change 2252 10983
INV change 14094 13630
CA change 15200 24516
Increase (Decrease) In current liabilities
NP change 1914 13133
AP change 3742 9492
ACC change 1658 2231
CL change 7314 24856
Net increase(decrease) in working 7886 (340)
capital
The statement of change in financial status for Sliver River Manufacturing Company for the year
2020 can be seen in the table above. It provides a detailed picture of the funding sources and
applications used by SRM. Additionally, it displays changes in working capital. Working capital,
which illustrates the company’s short-term liquidity, is the difference between changes in current
assets and current liabilities. Therefore, an examination of the causes causing a change in the
amount of net working capital is helpful for management’s and shareholders’ decision-making.
The change in working capital in 2020 dropped by $ 340 thousand as compared to the year 2019.
This indicates that SRM has greater current liabilities than current assets. As a result, it has a
5
negative impact on the company’s financial situation. It demonstrates that the company’s
payable amount is more than its property. Thus, by looking at SRM’s actual financial situation
and business activity, the bank may decide to turn down their request for an extra loan.
According to the figures above, there will be less money available for operations in 2020 than
there would be in 2019, which is due to a sharp decline in net income after taxes.
However, the long-term debt has not changed, and the source of funding has shrunk as a result of
the decline in net revenue. Working capital decreases as a result of a reduction in funding
sources.
Now, we can also see the changes in accounts receivable, accounts payable, current assets and
current liabilities for the three years 2018, 2019 and 2020 in the bar diagram below.
90000
80000
70000
60000
50000
40000
30000
20000
10000
0
Account Receivable Accounts Payables Current Assets Changes Current Liabilities
Changes
2018 2019 2020
With the help of the aforementioned graph, we can clearly see that the company’s account
receivable, or credit sales, are rising daily. It is made clear by the number that accounts payable
are less than accounts receivable.
6
ISSUE 1(B)
Calculate SRM’s key financial ratio for 2020 and compare them with those of 2018, 2019,
industry average, and contract requirement or complete Table 7.
Solution:
From the income statement and balance sheet of SRM for 2020 we have calculated the financial
ratios.
A company’s financial ratios can give you useful information on profitability, liquidity,
efficiency, and other factors. You can use these ratios to see how your business has done over a
specific time period. To understand how your company stacks up against other companies in
your field, you may also compare its financial ratios to industry averages.
Investors may also use financial ratios to assess a company’s health. Monitoring important
financial statistics is a smart idea if your firm is publicly traded because these figures might
affect how investors see your business. You can take actions to achieve outcomes that will be
more appealing to investors by being aware of the variables that influence these ratios.
Table 2: Ratio Analysis
Ratio Analysis year ended December 31

Particulars 2018 2019 2020 Industry Remarks
Average
Liquidity ratios
Current ratio,Times 3.12 2.75 1.79 2.50 Poor
Quick ratio, Times 1.71 1.16 0.77 1.00 Poor
Leverage ratios
Debt ratio (%) 40.01 45.36 58.81 50.00 Poor
Times interest earned, 15.08 8.17 1.49 7.70 Very Poor
Times
Asset management ratios
Inventory turnover 7.14 4.55 3.57 5.70 Poor
7
(Cost)Times
Inventory turnover (Sales), 8.98 5.60 4.19 7.00 Poor
Times
Fixed asset turnover 11.51 11.98 12.09 12.00 Ok
Total asset turnover 3.00 2.55 2.00 3.00 Poor
Average collection period 37.55 38.89 56.96 32.00 Very Poor
Profitability ratios
Profit margin (%) 6.04 4.07 0.45 2.90 Very Poor
Gross profit margin (%) 20.43 18.85 14.86 18.00 Poor
Return on total assets, (%) 18.14 10.40 0.89 8.80 Very Poor
Return on owner’s equity 30.23 19.03 2.17 17.50 Very Poor
We can tell from the table alone that SRM’s financial situation is getting worse every year. In
comparison to the industry average, many of the financial ratios are inferior.
Liquidity Ratios:
Liquidity ratio of an organization calculates an ability of organization to pay current liabilities.

Liquidity ratios are most useful when they are used in comparative form. Here, external analysis
is done which involves comparing the liquidity ratios of one company to another or an entire
industry. This information is useful to compare the company’s strategic positioning to its
competitors when establishing benchmark goals.
There are two types of liquidity ratio i.e. current ratio and quick ratio.
i. Current Ratio
Current ratio represents the company’s obligation to pay short-term loans or due within one year.
It shows how many times over the company can pay the current debt obligation with its assets. It
tells investors and analysts how a company can maximize the current assets on its balance sheet
to satisfy its current debt and other payables.
It is calculated as:
Current Assets
Current Ratio= Current Liabilities
8
Current Ratio
4.5
4
3.5
2.5
1.5
0.5
0
2018 2019 2020
Current Ratio Quick ratio
Figure 1: Current ratio
The current ratio for the year 2020 is 1.79 times where for 2019 and 2018 are 2.75 times and
3.12 times respectively. This shows that the current ratio for 2020 has been decreased drastically
as compared to 2018. This indicates that SRM are not able to pay its short term obligation which
is not good. Similarly, in 2018 and 2019 the current ratio of SRM is above the industry average
that is 2.50 times. But in 2020, the current ratio is below the industry average. This shows that
SRM are not able to pay its short term obligation as compared to their competitors. This
indicates that the company’s liquidity position is deteriorating day by day.
ii. Quick Ratio
Quick Ratio measures the liquidity position of the firm and shows the ability of the payment of
an organization. It provides more stringent test of liquidity than the current ratio. It shows how
well can the company meet its current short term debt without selling any of its inventory. It is
calculated as follows:
current assets−inventory
Quick Ratio=
current liabilities
9
Quick Ratio
1.8
1.6
1.4
1.2
0.8
0.6
0.4
0.2
0
2018 2019 2020
Quick Ratio Industrial Average
Figure 2: Quick ratio
As of the above data, we can conclude that the company’s liquidity position in 2018 is 1.71. It
was good when compared with industry average of 1.00. But it gradually decreased in the year
2019 and 2020 to 1.16 and 0.77. This implicate that the company cannot meet its current short-
term debt obligation without selling inventory because its quick ratio is less than the industry
average. If this condition continues, it may have further low ratio and low liquidity position
which may lead company to solvency. Therefore, organization must focus and make plan to
improve the quick ratio.
Leverage Ratios
Leverage ratios are used to determine the relative level of debt load that a business has incurred.
These ratios compare the total debt obligation to either the assets or equity of a business. The two
main leverage ratios are:
i. Debt Ratio
Debt ratios measure the extent to which an organization uses debt to fund its operations, as well
as the ability of the entity to pay for that debt. It is calculated as follows:
10
Total Debts
Debt Ratio = × 100%
Total Assets
Debt Ratio
60
50
40
30
20
10
0
2018 2019 2020
Debt Ratio Industrial Average
Figure 3: Debt ratio
In comparison to the industry average, SRM is taking more risk than the competitors where
industry average is 50% It is clear in the sense that the debt ratios have been in increasing trend
i.e. 40.01%, 45.36% and 58.81% in year 2018, 2019 and 2020 respectively which resembles the
company’s more dependency towards leverage in comparison with previous year. This results
the large amount of cash outflow in-terms on interest and principal payment for the SRM
Company.
i. Times Interest Earned Ratio
The times interest earned ratio is an indicator of a corporation’s ability to meet the interest
payments on its debt.
EBIT
Times Interest Earned Ratio (TIE) =
Interest Expenses
11
Time Interest Earned
16
14
12
10
0
2018 2019 2020
Time Interest earned Industrial Average
Figure 4: Time Interest Earned
The Times Interest Earned Ratio has declined over the year 2018 to 2020 but is not below
1. So, it is still able to meet its interest obligations. During the year 2018 it was above industry
average. But in the year 2020 it has drastically decreased to 1.49 and reached below industry
average of 7.7. It means that SRM’s interest paying capacity has decreased over the year.
Assets Management Ratio:

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. For example, these ratio scan provide insight
into the success of the firm’s credit policy and inventory management. It consists of receivables
turnover ratio, inventory turnover ratio, fixed assets turnover ratio and total assets turnover ratio.
A few of the most used asset management ratios are:
i. Inventory Turnover (Cost)
Inventory turnover (cost) ratio is an efficiency ratio that shows how effectively inventory is
managed by comparing costs of goods sold with average inventory for a period. The inventory
ratio (cost) can be calculated by using following formula:
12
Cost of Goods Sold
Inventory turnover ratio (cost) =
Average Inventory
Inventory Turnover
0
2018 2019 2020
Inventory Turnover Industry Average
Figure 5: Inventory Turnover Ratio (COGS)
ii. Inventory Turnover (Sale)
Inventory turnover (sale) is calculated to see if a company has an excessive inventory in

comparison to its sales level. ITR (sale) can be calculated by following formula:
Net Sales
Inventory turnover (sales) =
Inventory
13
Inventory Turnover Ratio (sale)
10
9
8
7
6
5
4
3
2
1
0
2018 2019 2020
Inventory Turnover(Selling) Industry Averaage
Figure 6: Inventory Turnover Ratio
Inventory Turnover Ratio has declined from 7.14 to 3.57 times on cost and 8.98 to 4.19 times on
sales in the year between2018 to 2020. The 2020 data shows that the company is turning its
inventory into sales over 4.19 times a year and it is much below the industry average. So, the
performance of the firm proves to be unsatisfactory.
iii. Fixed Assets Turnover
The fixed assets ratio is an efficiency ratio that measures a company’s return on their investment
in property, plant and equipment by comparing the net sales with the fixed assets.
Net Sales
Fixed Assets Turnover= Assets ¿
Net ¿
14
Fixed Assets Turnover
12.1
12
11.9
11.8
11.7
11.6
11.5
11.4
11.3
11.2
2018 2018 2020
Fixed Assets Turnover Industry Average
Figure 7: Fixed Assets Turnover Ratio
As of the above figure, it is clear that the higher the turnover of the organization, efficient is the
use of the assets of the organization or optimum utilization of the resources. Effective utilization
of fixed assets can be seen i.e.11.51 to 12.10 in 2018 to 2020. The 2020 data shows the
company’s turnover is greater than the industry average. This indicates that the company has
used its fixed assets efficiently
iv. Total assets turnover
This ratio measures the ability of the company to generate sales from its assets with the
comparison between the net sales with the total average total assets. The higher turnover ratio of
the company the efficiently the firm is using the assets of company to generate the sales. This
can be calculated as follows:
Net Sales
Total Asset Turnover =
Total Assets
15
Total Assets Turnover
2.5
1.5
0.5
0
2018 2019 2020
Total Assets Turnover Industry Average
Figure 8: Total Assets Turnover Ratio
In the above diagram, the asset turnover of the decreasing trend as 3.06 to 2.60 and 2.04 from the
year 2018 to 2020 and has reached below industry average of 3.00. This indicates that the
company is investing more in fixed assets and the sales is lowering. This shows company’s
inefficiency in utilizing its fixed assets. Hence, they should increase the sales and utilize the
assets properly.
iv. Average Collection Period
It is the average number of days require to collect invoiced amounts from customer. This helps to
calculate the effectiveness of the company’s credit granting policies and collection efforts. It is
the average number of days’ customer takes to pay their bills.
Accounts receivable
Average Collection Period =
Net Daily Credit sales
16
Average Collection Period
60
50
40
30
20
10
0
2018 2019 2020
Average Collection Period Industry average
Figure 9: Average Collection Period
It takes 37.55 days for SRM to collect its receivable in 2018. It has increased 56.96 in 2020.
When compared to the industry average, SRM is inefficient in collecting the credit on time to
their competitors.
1.4 Profitability Ratio
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 represents the final result of the company. It includes following;
i. Profit Margin
Profit margin is the net profit after tax earned by the company. Higher the profit margin of the
company better is the profit earned by the sales of the company.
Net Income
Net Profit Margin = × 100%
Net Sales
17
Profit Margin
0
2018 2019 2020
Net Profit Margin Industry Average
Figure 10: Net Profit Margin
From the above figure, the net profit margin of the company in 2018, 2019 and 2020 shows
6.04%, 4.07% and 0.45% respectively. The industry average of the SRM company is 2.90%.
Hence, we can conclude from this data that the new profit of the company is decreasing and
below the average. It would be better for this company to reduce its cost or increase the price of
the product to earn more profit.
ii. Gross Profit Margin
Gross profit margin is the margin earned by the company after deducting all direct expenses
from net sales.
Gross Profit
Gross Profit Margin = ×100%
Net Sales
18
25
20
15
10
0
2018 2019 2020
Gross Profit Margin Industry average
Figure 11: Gross profit Margin
From the figure, the gross profit margin is 20.43% in 2018 and 14.86% in 2020. This shows that
decreasing trends of the SRM. The industry average in terms of gross profit margin is 18%
which is greater than the Gross Margin of the SRM. This indicates company is unable to make
profit by using raw material, Labor and other manufacturing overheads.
iii. Return on Total Assets
The efficiency of the company can be calculated by using the ROA. It helps to manage the
efficient way of managing the assets to produce the profit during a period.
Net Income
ROA = ×100%
Total Assets
19
Return on Total Assets
20
18
16
14
12
10
8
6
4
2
0
2018 2019 2020
Return on Total Assets Industry Average
Figure 12: Return on Total Assets
In the above diagram, the asset turnover of the decreasing trend as 3.06 to 2.60 and 2.04 from the
year 2018 to 2020 and has reached below industry average of 3.00. This indicates that the
company is investing more in fixed assets and the sales is lowering. This shows company’s
inefficiency in utilizing its fixed assets. Hence, they should increase the sales and utilize the
assets properly.
iv. Return on owners’ equity
It is also an indicator of how effective management is at using equity financing to fund operation
and grow the company. It is profitability ratio from the investor’s point of view. Investors wants
higher return on equity ratio because this indicate that the company using its investors fund
effectively.
Net Income
ROE = ' ×100%
Total Owne r s Equity
20
Return on Equity
35
30
25
20
15
10
0
2018 2019 2020
Return on Equity Industry Average
Figure 13: Return on Equity
Capability of generating money from shareholder’s money determines ROE. During 2018 the
ROE of SRM was above industry average 30.23% but it reduced to below par during 2019
(19.03%) and 2020 (2.17%). We can conclude from this that there is a sharp fall in ROE to the
fact that Net Income of SRM has fallen significantly from 2018 to 2020.This indicates that SRM
is less efficient in generating profit from shareholder’s money as compared to its competitors.
Thus, SRM should focus on boosting its earning power so as to increase it ROE.
21
ISSUE 2
Based on the case data and the results of your analysis in Question1, what are the SRM’s
strengths weakness? What are the causes thereof? (Use of the Du Pont system and Altman
Z factor would facilitate analysis and strengthen your answer).
Solution:
Du Pont Analysis
The two measures of profitability, return on assets (ROA) and return on equity (ROE), which we
have computed in previously are a reflection of the use of debt financing, or financial leverage.
Du Pont Corporation developed a famous way of decomposing ROE into its component parts.
We know,
Net Income
ROE = Equity
Net Income Total Assets
ROE= Total Assets * Equity
ROE= ROA* Equity Multiplier
NetIncome Sales Assets
ROE = ( Sales )*( Assets )* ( Equity )
ROE = Net Profit Margin * Total Assets Turnover * Equity Multiplier
Thus, the return on equity (ROE) is the same as before. The above expression is called the Du
Pot Identity. The Du Pont Identity tells us that the ROE is affected by three things:
 Operating efficiency as measured by net profit margin.

 Asset use efficiency as measured by total assets turnover.
 Financial leverage as measured by equity multiplier.
If the investors are unsatisfied with a low ROE, the management can use this analysis to pinpoint
the problem area whether it is a lower profit margin, asset turnover, or poor financial leverage.
Table 1: Calculation of ROE
22
Particulars ROE = NPM × TAT × EM
Industry Average 17.50% = 2.90% × 3.00 × 2
2018 30.23% = 6.04% × 3.00 × 1.67
2019 19.03% = 4.07% × 2.55 × 1.83
2020 2.17% = 0.45% × 2.00 × 2.43
Remarks Poor Poor Poor Risky
The above table shows a decreasing trend in ROE due to the company's decreased net profit. NP
is decreasing year after year, while TAT is also decreasing year after year. TAT is decreasing as
a result of rapid asset growth and slower sales growth. A decreasing ROE indicates that the
company is becoming less efficient at generating profits as well as increasing shareholder value.
The ROE is good in 2019 compared to the industry average, but it has dropped to 19.03 percent
in 2019 and 2.17 percent in 2020, indicating very poor performance. The Net Profit Margin
(NPM) was 6.04 percent in 2018, which is a good ratio when compared to the industry average,
but it has also decreased to 4.07 percent in 2019, which is still acceptable when compared to the
industry average. However, by 2020, the NPM has fallen to 0.45 percent, which is highly
undesirable and demonstrates SRM's poor performance. The Total Assets Turnover (TAT) in
2018 was 2.55, which was acceptable compared to the industry average of 3, but it fell to 2.55 in
2019 which was unfavorable. The TAT was then reduced to 2.00 in 2020, indicating rapid asset
growth but slow sales growth. The Equity Multiplier (EM) was 1.67 in 2018, and it increased to
1.83 in 2019, making it less risky than the industry average of 2. However, in 2020, the EM
increased dramatically to 2.43, indicating SRM's risky position.
23
Now let’s look at the graphical presentation of the trend of ROE in 2018, 2019 and 2020.
Return on Equity
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
2018 2019 2020
Figure 14: Return on equity
The table and graph above show that Du Pont's ROE value is the same as it was prior to ROE. It
implies that management negligence is what caused the ROE to fall. By employing various
approaches and methods and keeping unused assets in stock, management shouldn't concentrate
on increasing sales. Low demand products are maintained in stock, requiring significant capital
expenditures and yielding little profit from keeping unsold inventories.
In order to increase assets turnover and ROE, management should concentrate on increasing
sales data, lowering low-demand inventory levels, and maintaining inventory with an
equal/quick turnover. Simply put, the ROE in 2020 will drop from 19.03 percent to 2.17 percent
based on the graph above. It demonstrates poor performance and management's lack of assurance
and expertise in terms of investment and capital returns.
Potential failure indicator
Altman Z Factor
One of the important uses that can be made of financial ratios is the analysis of the likelihood
that a firm will fail or become bankrupt. Beaver (1968) and Altman (1968) pioneered the use of
modern statistical analysis of financial ratios in the prediction of the likelihood of corporate
24
bankruptcy. They considered 14 different ratios and of those ratios considered, the “cash flow to
total assets” ratio was the best predictor of failure. In addition, it was also found that the debt
ratio and net income to total assets ratio were good predictors.
Altman formulated a predictive equation that produces a “Z-score”. If the Z-score for a firm is
less than 1.8, it is considered prime candidate for bankruptcy. A Z-score larger than 3 indicates a
high probability of non-failure. Z-scores between 1.8 and 3 fall in the “gray zone” where it is not
possible to predict with confidence whether the firm will or will not fail.
Financial professionals use Altman's Z-Score to choose whether to buy or offer shares in the

company, depending on the quality of the funds they review. As the Z sign approaches 3,
speculators may want to consider buying stock in the company, as the transaction is unlikely to
fail in the next period. That said, if you don't see a company with a Z-score close to 1.8,
the results indicate a high probability of failure, so financial professionals can keep a strategic
distance from losing a business agency.
Altman’s model appears as follows:
Z = 0.012X1+0.014X2 + 0.033X3 + 0.006X4 + 0.999X5
Where,
X1 = Working Capital / Total Assets

X2 = Retained Earning / Total Assets
X3= EBIT / Total Assets
X4 = Market Value of Equity / Book Value of Total Liabilities
X5 = Sales / Total Assets
If Z> 2.99, it represents ‘Safe’ Zone
If 1.81 < Z < 2.99, it represents ‘Grey’ Zone
If Z < 1.81, it represents ‘Distress’ Zone
Since from the previous analysis of the source and application of funds, changes in working
capital and various financial ratios, the performance of SRM doesn’t seem promising and safe.
So, we use Altman’s model to further analyze the company’s strengths and problem areas.
25
Table 4: Calculation of Altman Z-score
Particulars 2018 2019 2020
X1 = Working Capital / Total Assets 0.50 0.50 0.37
X2 = Retained Earnings/ Total Assets 0.19 0.23 0.17
X3 = EBIT/Total Assets 0.32 0.20 0.05
X4 = Market Value of Equity / Book Value of Total Liabilities 0.0299 0.0122 0.0007
X5 = Sales / Total Assets 3.00 2.55 2.00
Z-Score (Distress < 1.81 < Grey < 2.99 < Safe) 3.016 2.55 2.01
Working Notes:
For 2018:
Z= 0.012(0.5024)+(0.014×0.1887)+(0.033×0.3237)+(0.006×0.0299)+(0.999×3)= 3.016
41816−13392
X1 =
56580
×100% = 50.24%
X2= ( 10674
56580 )
×100 % = 18.87%
18317
X3= ×100 % = 32.37%
56580
MarketValueofEquity 67715.70
X4=
BookValueofTotalLiabilities
= 22636
×100= 2.99%
where,
value ofcommon stock 23270
no. of shares=
par value per share
= 1 = 23270 shares
Net Income 10262
Earnings per share (EPS) = = = 0.4409
no . of shares 22370
MPS
P/E Ratio= EPS
or, MPS¿ P/ ERatio × EPS

= 6.6×0.4409
26
=Rs. 2.91 per share
Market Value of Equity= No. of shares ×MPS
= 23270×2.91
= 67715.70
170000
X5 =
56580
= 3.00
For 2019:
Z= 0.012(0.50)+(0.014×0.2252)+(0.033×0.1974)+(0.006×0.0122)+(0.999×2.55)= 2.5631
57017−20706
X1 =
72465
×100% = 50%
X2= ( 16326
72465 )
×100 % = 22.52%
14310
X3= ×100 % = 19.74%
72465
MarketValueofEquity 39,933.65
X4=
= 32869
= 1.22
where,
no. of shares=
par value per share
= 1 = 23270 shares
Net Income 7535
MPS
P/E Ratio= EPS

= 5.3×0.3238
=Rs. 1.7161 per share

= 23270×1.7161
= 39,933.65
27
185000
X5 =
72465
= 2.55
For 2020:
Z= 0.012(0.368)+(0.014×0.1737)+(0.033×0.0454)+(0.006×0.007)+(0.999×3.06)= 2.01
81533−45562
X1 =
97715
×100% = 36.8%
X2= ( 16980
97715 )
×100 % = 17.37%
4445
X3= ×100 % = 4.54%
97715
X4=
= 57465
= 0.7%
where,
no. of shares=
par value per share
= 1 = 23270 shares
Net Income 873
MPS
P/E Ratio= EPS

= 4.6×0.037516
= 23270×0.1726
= 4015.79
195732
X5 =
97715
= 3.06
Interpretation of the Altman Z-scores
28
In 2018, Altman Z-score of SRM is 3.00 which means the company is in the safe zone and there
is high chance of non-failure. But in 2019, the Altman Z-score declined to 2.55 which puts the
company in the gray zone where it has to be very careful in making the financial decisions to
stay afloat. However, in 2020, the Altman Z-score further declines to 2.00 which is even lower in
the gray zone which indicates more risk of bankruptcy. It is hard to say with certainty if the
company will go bankrupt or not but it is certain that the company is in poor financial position.
The graphical representation of the calculated Altman Z-score is as follows:
Z Score
3.50
3.01
3.00
2.56
2.50
2.01
2.00
1.50
1.00
0.50
-
2018 2019 2020
Figure15: Altman Z-score
Calculations and the chart representation show that the banker (MCNB) should decide before
approving a $6,000,000 additional loan. The positive statistics in this ratio indicates that the
corporation should pay the interest and repay the additional loan within the next two years. Due
to this, it is often required to base the loan approval decision on the performance of the company
in the previous fiscal year.
Strength and weaknesses of SRM based on the analysis of Issue 1 and from Du Pont Analysis
and Altman Z factor are as follows:
Strengths:
29
1. Favorable fixed asset turnover ratio:
In 2020, the fixed asset turnover ratio will rise. SRM has successfully turned its fixed
assets a number of times. This demonstrates that the fixed assets are being used
effectively.
2. Altman Z score:
SRM's Altman Z score is compatible with the industry average. Despite the fact that the
factor is in line with the industry average, it is not a good sign for the company. The
company is in the gray zone and should be more cautious about going bankrupt.
3. Other points of strength

 SRM owns several patents, which allow it to mitigate some of the risks.
 SRM's products are technologically advanced, and demand is gradually increasing
in both the domestic and international markets.
 Some of its farm plants that were destroyed by environmental issues are being
repurposed for production.
Weaknesses:
1. Profitability ratios are declining:

All profitability ratios are declining in 2020. From 2018 to 2020, the net profit margin
shrank dramatically and is now lower than the industry average. According to Du Pont
analysis, the net profit margin is lower than the industry average of 2.90, indicating
operational inefficiency.
2. Inefficiency in major asset management ratios:

From 2018 to 2020, the major asset management ratios are declining. According to the
Du Pont analysis, the asset turnover ratio has decreased from 3.06 in 2018 to 2.04 in
2020. The industry standard is 3. The assets have not been used effectively to generate
sales.
30
3. Liquidity position:
We discovered that the SRM's current, quick, and debt ratios did not meet the contractual
limits set by the SRM with its stakeholders. The company is not in a position of relative
liquidity. The company's current assets are less than its current liabilities, resulting in a
negative net working capital. The current and quick ratios also reflect SRM's less liquid
position.
4. Deteriorating financial leverage:

As seen by the debt ratio in 2020, the company borrowed money to finance more over
half of its assets. According to the Du Pont analysis, the equity multiplier in 2020 is
higher than it is in 2018, 2019, and the industry average. This shows that SRM is
financing its assets with greater debt than its rivals. This suggests that there is a good risk
the business will go bankrupt.
5. Other weaknesses:
Another flaw is that SRM's analysis and forecasting tools are subpar, which is why Mr.
White adopted a sales-growth and market-share-capturing plan with little profit margin.
31
ISSUE 3
If the bank were to maintain the present credit lines and grant an additional $6,000,000
short term loan at a 16% 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 40%. Assume that
SRM pays no cash dividend during the year.) Complete tables 9 and 10 included as
worksheets to facilitate analysis.
The financial picture that management feels it can achieve as of a future date is derived from a
projected financial statement, which considers existing trends and forecasts. Financial forecasts
make use of actual or predicted financial data to predict future revenue and costs for your
company. In accordance with Greg White’s prognosis, we have generated the predicted income
statement and balance sheet for Silver River manufacturing company here which provides a
summary of the company's assets, liabilities, and shareholders' equity at a specific point of time
and is crucial for calculating rates of return and evaluating its capital structure.
Table 5: Silver River Manufacturing Company
Pro-forma Income Statement (Projected)

Particulars 2020(given) 2021(projected) 2022(projected)
Sales 195732 207476 227186
Cost of goods sold 166642 171168 181749
Gross profit 29090 36308 45437
Admn. &selling 16880 16598 17039
Depreciation 2040 2423 1824
Misc expenses 5725 3631 2840
Total operating expenses 24645 22652 21703
EBIT 4445 13656 23734
interest on short term loan 1823 3877 3877
interest on long term loan 956 860 774
interest on mortgage 211 190 171
Earning before taxes 1455 8729 18912
taxes @40% 582 3492 7565
Net income 873 5237 11347
Dividend on stock 218 0 0
Addition to retained earnings 655 5237 11347
32
Working notes:
Particulars 2021(projected) 2022(projected)
Sales 195732×1.06=207476 207475.92×1.095=227186
COGS 82.5% of 207475.92=171168 80% of 227186.11=181749
Admin. &Selling expenses 8% of 207475.92=16598 7.5% of 227186.11=17039
Misc. expenses 1.75% of 207475.92=3631 1.25% of 227186.11=2840
Greg White 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. As per Greg White’s predictions for 2021 and 2022, the weighted average sales
increase would be 6 and 9.5 percent, respectively. According to Greg White's appraisal of the
situation for the next two years, assuming no notable improvements in the national or farm
economy, the estimate of market segment growth rates and sales mix proportions for 2021 and
2022 reflects this assumption.
Additionally, it is anticipated that SRM will abandon its aggressive marketing and sales
promotion strategy and return to full margin pricing, typical industry loan terms, and stricter
credit standards. With these adjustments, the company should be able to lower its cost of goods
sold from over 85% of sales in 2020 to roughly 82.5 percent in 2021 and 80% in 2022. White
anticipates being able to lower selling and administrative costs from approximately 9 percent of
sales to 8 percent in 2021 and to 7.5 percent in 2022. Miscellaneous expenses will also see
significant savings, with the goal of bringing them down to around 1.75 percent of sales in 2021
and 1.25 percent in 2022. The industry standard for collection times and inventory turnover shall
be upheld. Thus, the company's projected net profit has increased, coming in at 5237 and 11347
thousand in the years 2021 and 2022, respectively, due to an increase in gross profit and a drop
in all types of expenses.
For SRM, we similarly created the predicted Balance sheet Statement. The balance sheet
statement provides a summary of the business's assets, liabilities, and shareholders' equity at a
specific point of time and is crucial for calculating rates of return and evaluating its capital
structure. The financial statement describes the assets and liabilities of a firm as well as the
amount of money invested by investors.
33
Proforma Balance Sheet (projected)

Assets 2020 2021(projected) 2022(projected)
cash 3905 38078 49677
Recievables 30970 18442 20194
Inventories 46658 30030 31886
Total current assets 81533 86550 101757
Land,building,plant ,& equipment 22874 29249 30126
Less:depreciation (6692) (9116) (10939)
Net fixed assets 16182 20132 19187
Total assets 97715 106682 120944
Liablities and Equities 2020 2021 2022

Short term bank loans 18233 24233 24233
Accounts payable 19998 15995 16795
Accruals 7331 9301 11626
Total current liabilities 45562 49529 52654
Long term bank loan 9563 9563 9563
Mortgage 2340 2104 1894
Long term debt 11903 11666 11456
Total liabilities 57465 61195 64110
Common stock 23270 23270 23270
Retained earnings 16980 22217 33564
Owner’s equity 40250 45487 56834
Total Liabilities and equity 97715 106682 120944
Working note:
1.calculation of retained earning

Retained earning = closing retained earning +addition to retained earning
For 2021 for 2022
Retained earning = 5237+16980 retained earning = 22217+11347
=22217 =33564
2.Calculation of account receivables
Industry average of average collection period=32
34
recievables
Days sales outstanding = annualsales
( )
360
For 2021 for 2022
207476 227186
Or, 32× = recievables or, 32×
360 360
i.e. receivables = 18442 i.e. receivables =20194
3. calculation of inventory
Industry average if inventory turnover ratio = 5.7
cost of goods sold
Inventory turnover ratio =
inventory
For 2021 for 2022
171168 181749
Or, inventory = or, inventory =
5.7 5.7
i.e. inventory = 30030 i.e. inventory = 31886
Cash is used as the residual balance in these calculations, and SRM's tax rate is set at 40%.
During these two years, SRM has not paid any cash dividends. The retained earning was
calculated by adding previous years closing retained earnings and account receivable was
calculated at industry average days sales outstanding (DSO). Similarly, inventory was calculated
at industry average inventory turnover ratio. The cash balance at the end of 2021 and 2022 was
38078, 49677 respectively.
The minimum cash balance to be maintained by the company is 5% of sales.
2021= 5% of 207476
= 10374
The remaining cash balance in the company even after maintaining minimum cash balance in
2021= 38078-10374
= 27704
The short-term loan existing in 2021 is 24233.
Hence, The Company will be able to retire short term loans that are outstanding as of December
31, 2021, according to the above computation, as the company is able to maintain the required
35
minimum cash level and has sufficient cash on hand to do so in the event that the prediction
came true.
ISSUE 4
Compute projected financial ratios for the 2021 and 2020 (or complete table 11). Compare
this ratio with 2020 along with industry average and analyze improvement or deterioration
in financial condition.
After the preparation of the financial statement for the year 2020, Mr. White has asked his
assistant to verify the bank’s evaluation of the company’s current fiscal situation and to put
together a forecast of SRM’s expected performance of 2021 and 2022. Moreover, Mr. White has
instructed his assistant to ignore the possibility of the reduction in the credit line.
Financial ratio analysis is used to assess the firm's financial strengths and shortcomings. The
study is often based on the firm's financial statements. Financial ratios are important tools in
financial analysis. They provide a reasonable technique for analyzing the firm's financial
performance.
The following predicted financial ratios for 2021 and 2022 are calculated on the basis of above
projected financial statement and also examined the improvement or deterioration in SRM's
financial status using these financial ratios.
Ratio analysis for the year ending December 31(projected)

Financial ratio 2020 2021 2022 Industry average Remarks
Liquidity ratio
Current ratio, Times 1.79 1.75 1.93 2.50 Poor
Quick ratio, Times 0.77 1.14 1.33 1.00 Ok
Leverage ratio
Debt ratio (%) 58.81 57.36 53 50.00 Poor
Time interest earned 1.49 2.77 4.92 7.70 Poor
Asset management ratio
Inventory turnover (COGS), 3.57 5.7 5.7 5.70 Ok
Times
36
Inventory turnover (sales) Times 4.19 6.91 7.12 7.00 Ok
Fixed assets turnover 12.09 10.31 11.84 12.00 Ok
Total assets turnover ratio 2.003 1.94 1.88 3.00 Poor
Average collection period 56.96 31.99 31.99 32.00 Ok
Profitability ratio
Net profit margin % 0.45% 2.52% 4.99% 2.90 Good
Gross profit margin % 14.86% 17.49% 20% 18.00 Good
Return on total assets % 0.89% 4.91% 9.38% 8.80 Ok

Return on equity % 2.17% 11.51% 19.96% 17.50 Ok
Du Pont Analysis:
This model was developed to analyze ROE and the effects different business performance
measures have on this ratio. If the investors are unsatisfied with a low ROE, the management can
use this analysis to pinpoint the problem area whether it is a lower profit margin, asset turnover,
or poor financial leverage. This analysis can be expressed with the help of:
ROE = NPM * TAT * EM

ROE = Net Profit Margin * Total Assets Turnover * Equity Multiplier
ROE = (Net Income/Sales)* (Sales/ Assets)* (Assets / Equity)
Thus, the return on equity (ROE) is the same as before. The above expression is called the Du
Pot Identity. The Du Pont Identity tells us that the ROE is affected by three things:
 Operating efficiency as measured by net profit margin.

 Asset use efficiency as measured by total assets turnover.
 Financial leverage as measured by equity multiplier.
If the investors are unsatisfied with a low ROE, the management can use this analysis to pinpoint
the problem area whether it is a lower profit margin, asset turnover, or poor financial leverage.
Table 8: The Du Pont Analysis
Particular ROE = NPM × Asset Turnover × Equity

Multiplier
37
2020 (Actual) 2.17% = 0.45% × 2 × 2.43
2021 (Projected) 11.46% = 2.52% × 1.94 × 2.34
2022 (Projected) 19.96% = 4.99% × 1.88 × 2.13
Industry average 17.5% 2.9% 3 2
Remarks Ok Good Poor Good
Working Notes:
Net profit margin Net income/sales Answer

2020(Actual) 873/195,732 0.00446
2021(Projected) 5238/2,07,476 0.0252
2022(Projected) 11347/2,27,186 0.0499
Return on Equity
25.00%
20.00%
15.00%
10.00%
5.00%
Figure
16:
0.00%
2020 2021 2022
Return
on Equity
Altman Z Factor
This concept may be used to predict the profitability that a firm will go into bankruptcy within
two years. Z-scores are used to predict corporate defaults and an easy-to-calculate control
38
measure for the financial distress status of companies in academic studies. It measures the
financial health of a company. Bankruptcy is the legal proceeding involving a person or business
that is unable to repay outstanding debts. This can be calculated as:
Z = 0.012X1+0.014X2 + 0.033X3 + 0.006X4 + 0.999X5

Where,
If Z> 2.99 , it represent ‘Safe’ Zone
If 1.81 < Z < 2.99 , it represent ‘Grey’ Zone
If Z < 1.81 ,it represent ‘Distress’ Zone
Table 9: Projected Altman Z score
X1 = Working Capital / Total Assets 0.50 0.3470 0.4060
X2 = Retained Earnings/ Total Assets 0.19 0.0491 0.0938
X3 = EBIT/Total Assets 0.32 0.1280 0.1962

X4 = Market Value of Equity / Book Value of
Total Liabilities 0.0007 0.0005 0.0012
X5 = Sales / Total Assets 3.00 1.94 1.87

Z-Score (Distress < 1.81 < Grey < 2.99 < Safe) 2.00 2.85 3.14
Working Notes:
For 2020:
81533−45562
X1 =
97715
×100% = 36.8%
39
X2= ( 16980
97715)×100 % = 17.37%
4445
X3= ×100 % = 4.54%
97715
X4=
= 57465
= 0.07
where,

no. of shares=
par value per share
= 1 = 23270 shares
Net Income 873

MPS
P/E Ratio= EPS
= 4.6×0.037516
= 23270×0.1726
= 4015.79
195732
X5 =
97715
= 3.06
For 2021:
86550−49529
X1 =
106682
×100% = 34.70%
X2= ( 106682
5237
)× 100 % = 4.91%
40
13656
X3= ×100 %= 12.80%
106682
X4=
= 61195
= 0.047
where,

no. of shares=
par value per share
= 1 = 23270 shares
Net Income 5237

MPS
P/E Ratio= EPS
= 5.5×0.22581
= 23270×1.2378
= 288097.95
207476
X5 =
106682
= 1.94
For 2022:
101757−52654
X1 =
120944
×100% = 40.60%
X2= ( 120944
11347
) ×100 % = 9.38%
23734
X3= × 100 %= 19.62%
120944
41
X4=
= 64110
= 0.115%
where,

no. of shares=
par value per share
= 1 = 23270 shares
Net Income 11347

MPS
P/E Ratio= EPS
= 6.5×0.4876
= 23270×3.1696
= 73755.5
227186
X5 =
120944
= 1.87
Z Score
3.50
3.97
3.00 3.69
2.50
2.00
2.00
1.50
1.00
0.50
-
2020 2021 2022
Figure 17: Projected Altman Z score
42
43
Interpretations
In 2021 the projected current ratio is lower than 2020 and industry average. This shows that the
company ability to meet short term obligation has decreased by 1.79 to 1.75 in 2021. In 2022 the
projected current ratio is higher than 2020 and lower than industry average. This shows company
ability to meet short-term obligations has improved by 1.79 to 1.93 but still poor in comparison
to industry average. In 2021 and 2022 quick ratio is higher than 2020 and industry average. This
shows the company to meet its short-term obligation has improved by 0.77 to 1.14 and 0.77 to
1.33. In 2021 and 2020
The debt ratio is lower than 2020 and higher than the industry average. This shows the company
has decreased its assets which is financing from debts but is higher than industry average. The
company has minimized its risk level. In 2021- and 2022-times interest earned ratio is higher
than in 2020 but lower than industry average by (1.49 < 2.77 < 7.7) and 1.49< 4.92<7.7). This
shows the ratio is increased but still lower than industry average which shows the improvement
in ability to cover necessary interest expenses.
Inventory turnover ratio (COGS) ratio has been increased in 2021 and 2022 than in 2020 and
equal to industry average by 3.57 to 5.7, 3.57 to 5.7 and 5.7 = 5.7. This shows the company
inventory is producing sales as the industry average. Inventory turnover ratio (sales) in 2021
ratio is higher than 2020 and lower than industry average (4.19<6.91<7). The fixed assets
turnover ratio in 2021 and 2022 lower than 2020 and industry average. (12.09>10.31<12) and
(12.09>11.84<12). In 2021 and 2022 this ratio is lower than 2020 and industry average
(2.003>1.94<3) and (2.003 >1.88<3). This shows the ratio is decreasing in 2020, 2021 and 2022
below the industry average. Average collection period in 2021 and 2022 average collection
period is lower than the in2020 but equal to the industry average. This company has sufficient
improvement in average collection period in comparison to 2020.
Net profit margin ratio in 2021 this ratio is higher than 2020 but lower than the industry average
(0, 45% < 2.52 %< 2.9%). In 2022 ratio has been improved and higher than 2021 and industry
average. This shows financial condition of company is improved in 2022. Gross profit margin in
2021 the projected gross profit margin is increased than 2020 but below the industry average. In
44
2022 the gross profit margin is increased than 2021 and industry average. This shows that
financial condition of company is improved. Return on assets is increased in 2021 and 2020 than
2015. In year 2021 company has failed to maintain industry average but in 2022 ROA is
improved which means good sign of company progress. In 2021 ROE is improved than 2020 but
still below the industry average. But in 2022 ROE is above the industry average which show the
improvement in both operating and financial condition of company.
Liquidity ratio
Current ratio
The current ratio measures the firm’s ability to pay its short-term obligations through their
current assets. It tells investors and analysts how a company can maximize the current assets on
its balance sheet to satisfy its current debt and other payables.
Current ratio = current assets/current liabilities

For
2020 2021 2022
81533/45562 86550/49529 101757/52654

= 1.79 = 1.75 = 1.93
Quick ratio
The quick ratio measures the firm’s short-term liquidity position and measures the firm’s ability
to meet its short-term obligations with its most liquid assets.
Quick ratio = current assets-inventory/current liabilities

For
2020 2021 2022
81533-46658/45562 86550-30030/49529 101757-31886/52654

= 0.77 = 1.14 = 1.33
45
Leverage
Debt ratio measures the total amount of debt relative to assets owned by a company. By using
this ratio, analysts can compare one company's leverage with that of other companies in the same
industry. This information can reflect how financially stable a company is.
Debt ratio = total debt /total assets

For
2020 2021 2022
57465/97715 61195/106682 64110/120944

= 58.81 = 57.36 = 53
Time interest earned

The times interest earned (TIE) ratio is a measure of a company's ability to meet its interest
obligations based on its current income before tax. The formula for a company's TIE number is
earnings before interest and taxes (EBIT) divided by the total interest payable on bonds and other
debt.
Time interest earned= EBIT / Interest

For
2020 2021 2022
4445/2990 13616/4927 23734/4822

=1.48 = 2.77 = 4.92
Assets management ratio

Inventory Turnover Ratio (COGS): Inventory turnover is a ratio that measures the number of
times inventory is sold or consumed in a given time period. Also known as inventory turns, stock
turn, and stock turnover, the inventory turnover formula is calculated by dividing the cost of
goods sold (COGS) by inventory.
46
Inventory turnover(COGS)=COGS/Inventory
For
2020 2021 2022
166642/46658 171168/30029 181749/31886

=3.57 = 5.7 = 5.69
Inventory turnover ratio(sales)=sales/inventory

For
2020 2021 2022
195732/46658 207476/30029 227186/31886

= 4.19 = 6.91 = 7.12
Fixed Assets Turnover: The fixed asset turnover ratio is used by analysts to measure operating
performance. This efficiency ratio compares net sales to fixed assets and measures a firm’s
ability to generate net sales from its fixed-asset investments.
Fixed assets turnover = sales/new fixed assets

For
2020 2021 2022
195732/16182 207476/20132 227186/19187

= 12.09 = 10.31 = 11.84
Total asset turnover ratio: The asset turnover ratio measures the efficiency of a company's
assets to generate revenue or sales. It compares the dollar amount of sales or revenues to its total
assets.
47
Total assets turnover = sales/net total asset
For
2020 2021 2022
195732/97715 207476/106682 227186/120944

= 2.003 = 1.95 = 1.88
Average collection periods: The average collection period measures the amount of time it takes
for a business to receive payments owed by its clients in terms of accounts receivable (AR).
Companies calculate the average collection period to make sure they have enough cash on hand
to meet their financial obligations.
Average collection period = account receivable/sales x 360

For
2020 2021 2022
30970/195732 x 57 18442/207476 x360 20194/227186x360
= 56.96 = 31.99 = 31.99
Net Profit Margin: Net profit margin is the ratio of net profits to revenues for a company or
business segment. The net profit margins demonstrate how much of each dollar in revenue
collected by a company translates into profit.
Profit margin (%) = net income / revenue

For
2020 2021 2022
873/195732 5237/207476 11347/227186

= 0.45% = 2.52 % = 4.99%
48
Gross Profit Margin: Gross profit margin is use to assess a company's financial health by
calculating the amount of money left over from product sales after subtracting the cost of goods
sold (COGS).
Gross profit margin (%) = gross profit / net sale x 100 %

For
2020 2021 2022
29090/195732 36308/207476 45437/227186

= 14.86% = 17.49% = 20 %
Return on Total Assets: Return on total assets (ROTA) is a ratio that measures a company's
earnings before interest and taxes (EBIT) relative to its total net assets. It is defined as the ratio
between net income and total average assets, or the amount of financial and operational income a
company receives in a financial year as compared to the average of that company's total assets.
Return on total assets = net income / total asset

For
2020 2021 2022
873 / 97715 5237/106682 11347/120944

= 0.89% = 4.91% = 9.38%
Return on Owners Equity: Return on equity (ROE) measure the financial performance of the
firm by dividing net income by shareholders' equity. Because shareholders' equity is equal to a
company’s assets minus its debt, ROE is considered the return on net assets. ROE is considered a
measure of the profitability of a corporation in relation to stockholders’ equity.
49
Return on owner equity = net income/owner equity
For
2020 2021 2022
873 / 40250 5237/ 45487 10128/ 56843

= 2.17 % = 11.51% = 17.82%
Liquidity ratio
Liquidity is a relative measure of the nearness to cash of the assets and liabilities of a company.
Nearness to cash deals with the length of time before cash is realized. Current assets are assets
that will be converted into cash or consumed within one year or within one operating cycle. The
operating cycle of manufacturing company is the length of time between the purchase of raw
materials and the eventual collection of any outstanding account receivable from the sale of
product. Current liabilities are a company’s obligations that require the use of current assets or
the creation of other current liabilities to satisfy the obligations.
Current ratio: In 2021 the projected current ratio is lower than 2020 and industry average. This
shows that the company ability to meet short term obligation has decreased by 1.79 to 1.75 in
2021. In 2022 the projected current ratio is higher than 2020 and lower than industry average.
This shows company ability to meet short-term obligations has improved by 1.79 to 1.93 but still
poor in comparison to industry average.
50
2.5 2.5 2.5
2.5
1.93
2 1.79 1.74
1.5
0.5
0
2020 2021 2022
cr industry
Figure 18: Projected Current ratio
Quick ratio: In 2021 and 2022 quick ratio is higher than 2020 and industry average. This shows
the company to meet its short-term obligation has improved by 0.77 to 1.14 and 0.77 to 1.33.
1.4
1.2
0.8
0.6
0.4
0.2
0
2020 2021 2022
QR industry
Figure 19: Projected Quick Ratio
Leverage
Debt ratio: In 2021 and 2020 the debt ratio is lower than 2020 and higher than the industry
average. This shows the company has decreased its assets which is financing from debts but is
higher than industry average. The company has minimized its risk level.
51
60
58
56
54
52
50
48
46
44
2020 2021 2022
DR industry
Figure 20: Projected Debt Ratio
Time interest earned ratio: In 2021 and 2022 time interest earned ratio is higher than in 2020
but lower than industry average by (1.49 < 2.77 < 7.7) and 1.49< 4.92<7.7). This shows the ratio
is increased but still lower than industry average which shows the improvement in ability to
cover necessary interest expenses.
0
2020 2021 2022
TIE Iindustry
Figure 21: Projected time interest earned ratio

Inventory turnover ratio (COGS): This ratio has been increased in 2021 and 2022 than in 2020
and equal to industry average by 3.57 to 5.7, 3.57 to 5.7 and 5.7 = 5.7. This shows the company
inventory is producing sales as the industry average.
52
6
0
2020 2021 2022
inv.t(cogs) industry
Figure 22: Projected inventory turnover ratio (COGS)
Inventory turnover ratio (sales): In 2021 ratio is higher than 2020 and lower than industry
average (4.19<6.91<7).
0
2020 2021 2022
inv.t(sales) industry
Figure 23: Projected inventory turnover ratio (sales)
Fixed assets turnover ratio: The fixed assets turnover ratio in 2021 and 2022 lower than 2020
and industry average. (12.09>10.31<12) and (12.09>11.84<12).
53
12.5
12
11.5
11
10.5
10
9.5
9
2020 2021 2022
F.asset tv. Series 2
Figure 24: Projected fixed assets turnover ratio
Total assets turnover ratio: In 2021 and 2022 this ratio is lower than 2020 and industry average
(2.003>1.94<3) and (2.003 >1.88<3). This shows the ratio is decreasing in 2020, 2021 and 2022
below the industry average.
2.5
1.5
0.5
0
2020 2021 2022
TA TV R INDUSTRY
Figure 25: Projected total assets turnover ratio
Average collection period: In 2021 and 2022 average collection period is lower than the in2020
but equal to the industry average. This company has sufficient improvement in average
collection period in comparison to 2020.
54
60
50
40
30
20
10
0
2020 2021 2022
ACP INDUSTRY
Figure 26: Projected Average collection period
Net profit margin ratio: In 2021 this ratio is higher than 2020 but lower than the industry
average (0. 45% < 2.52 %< 2.9%). In 2022 ratio has been improved and higher than 2021 and
industry average. This shows financial condition of company is improved in 2022.
4.5
3.5
2.5
1.5
0.5
0
2020 2021 2022
NPM Industry
Figure 27: Projected net profit margin
Gross profit margin: In 2021 the projected gross profit margin is increased than 2020 but below
the industry average. In 2022 the gross profit margin is increased than 2021 and industry
average. This shows that financial condition of company is improved.
55
20
18
16
14
12
10
0
2020 2021 2022
GPM INDUSTRY
Figure 28: Projected gross profit margin
Return on total assets: Return on assets is increased in 2021 and 2020 than 2015. In year 2021
company has failed to maintain industry average but in 2022 ROA is improved which means
good sign of company progress.
10
0
2020 2021 2022
re.on TA industry
Figure 29: Projected return on total assets
Return on equity: in 2021 ROE is improved than 2020 but still below the industry average. But
in 2022 ROE is above the industry average which shows the improvement in both operating and
financial condition of company.
56
20
18
16
14
12
10
0
2020 2021 2022
ROE industry
Figure 30: Projected return on equity
57
ISSUE 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 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 10: Silver Manufacturing Company
Income Statement (Revised)

(Thousands of Dollars)
Net Sales 195732 207476 227186
Cost of goods sold 166642 171168 181749
Gross profit 29090 36308.3 45437.2
Administration & selling 16880 16598.1 17039
Depreciation 2040 2423 1824
Misc. expenses 5725 3630.83 2839.83
Total operating expenses 24645 22651.9 21702.8
Earnings before Interest & Tax (EBIT) 4445 13656.4 23734.4
Interest on short-term loan 1823 1939 1939
Interest on long-term loan 956 860 774
Interest on mortgage 210.6 190 171
Earning before Tax (EBT) 1455.4 10667.4 20850.4
Taxes: @40 percent 582.16 4266.95 8340.18
Net income 873.24 6400.43 12510.3
Dividend on stock: 25 percent 218.31 1600.11 3127.57
Addition on retained earnings 654.93 4800.32 9382.7
58
The revised EBIT for 2021 and 2022 is $ 13,656 and $ 23,734 respectively. And also, SRM has
decided to pay all short-term loans by the end of the first half of 2021. The revised interest rate
on long-term loans is $ 860 and $ 774 for 2021 and 2022 and mortgage interest at $ 190 and $
171 for 2021 and 2022. The revised net income for 2021 and 2022 will be increased. Due to
which they will be able to distribute the regular dividend on stock i.e., $ 1,600 and $ 3,218 for
2021 and 2022 respectively.
Balance Sheet (Revised)

(Thousands of Dollars)
Assets 2020 2021 2022
Cash 3,905 13,408 23,044
Receivables 30,970 18,442 20,194
Inventories 46,658 30,029 31,886
Total current assets 81,533 61,880 75,124
Land, building, plant & equipment 22,874 29,249 30,126
Less: Depreciation (6,692) (9,116) (10,939)
Net fixed assets 16,182 20,133 19,187
Total Assets 97,715 82,013 94,311
Liabilities and Equity 2020 2021 2022
Short-term bank loans 18,233 - -
Accounts payable 19,998 15,995 16,795
Accruals 7,331 9,301 11,626
Total current liabilities 45,562 25,296 28,421
Long-term bank loan 9,563 9,563 9,563
Mortgage 2,340 2,104 1,894
Long-term debt 11,903 11,666 11,457
Total liabilities 57,465 36,962 39,878
Common stock, $1Par 23,270 23,270 23,270
Retained earnings 16,980 21,780 31,163
Owner's equity 40,250 45,050 54,433
Total liabilities and equity 97,715 82,013 94,311
59
Working Note
1. Retained earnings
2021: Retained earnings (2020) + Additional in 2021(Revised)
16980 + 4800 = 21,780
2022: Retained Earnings (2021) + Additional in 2022
21780 + 9383 = 31,163
Notes:
1. Cash is the balancing figure.
2. Major changes have been observed in ratios like current, quick, debt ratio, interest
earned, total assets turnover, profit margin, ROA and ROE.
When the company repays all its short-term bank loans at the end of the first half of 2021, then
the company will be able to pay its regular dividend in coming years. For the projection of
income statements and balance sheets we have certain information provided. Sales growth of 6%
and 9.5% in 2021 and 2022 respectively, COGS 82.5 % and 80% of sales in 2021 and 2022
respectively.
Further, administrative and selling Expenses are reduced from 9% to 8% in 2021 and to 7.5% of
sales in 2022. As well as miscellaneous expenses 1.75% and 1.25% of sales in 2021 and 2022
respectively. Average collection period will be 32 days and inventory turnover (cost) will be 5.7
times and inventory turnover selling will be 7 times as maintained at industry average. Tax rate
is 40% and dividend is provided 25% of the net income and remaining amount will be retained at
the company. MCNB will charge 16% for the short-term loan.
60
Ratio Analysis for the year ending December 31 (Revised)

Industry Remarks Remarks
Financial Ratios 2020 2021 2022 Contract
Average (2021) (2022)
Liquidity ratio
1. Current Ratio, Times 1.79 2.45 2.64 2.5 2 Ok Ok
2. Quick ratio, Times 0.77 1.26 1.52 1 1 Ok Ok
Leverage ratio
3. Total Debt/ Total
Assets, % 58.81 45.07 42.28 50 55 Good Good
4. Times Interest
Earned, Times 1.49 4.57 8.23 7.7 Poor Good
Asset management
ratio
5. Inventory Turnover
(COGS), Times 3.57 5.70 5.70 5.7 Ok Ok
6. Inventory Turnover
(sales), Times 4.20 6.91 7.13 7 Ok Ok
7. Fixed Assets
Turnover 12.10 10.31 11.84 12 Poor Ok
8. Total Assets
Turnover 2.00 2.53 2.41 3 Poor poor
9. Average collection
period 56.96 32.00 32.00 32 Ok Ok
Profitability ratio
10. Net profit margin, very
% 0.45 3.08 5.51 2.9 Good Good
11. Gross profit margin,
% 14.86 17.50 20.00 18 Ok Good
12. Return on Total very
Assets, % 0.89 7.80 13.26 8.8 Poor Good
13. Return on Equity, very
% 2.17 14.21 22.98 17.5 Poor Good
61
Working note
Liquidity
Current ratio = current assets/current liabilities

For
2020 2021 2022
81533/45562 61880/25296 75124/28421

= 1.79 = 2.45 = 2.64
Quick ratio = current assets-inventory/current liabilities

For
2020 2021 2022
81533-46658/45562 61880-30029/25296 75124-31886/28421

= 0.77 = 1.26 = 1.52
Leverage
Debt ratio = total debt /total assets

For
2020 2021 2022
57465/97715 36963/820123 39878/94311

= 58.81 = 45.07 =42.28
62
Time interest earned= EBIT / Interest
For
2020 2021 2022
4445/2990 13656.4/2989 23734.4/2884

=1.48 = 4.57 = 8.23
Inventory turnover (COGS)=COGS/Inventory

For
2020 2021 2022
166642/46658 171168/30029 181749/31886

=3.57 = 5.7 = 5.7
Inventory turnover ratio(sales)=sales/inventory

For
2020 2021 2022
195732/46658 207476/30029 227186/31886

= 4.19 = 6.91 = 7.13
Fixed assets turnover = sales/net fixed assets

For
2020 2021 2022
195732/16182 207476/20133 227186/19187
63
= 12.09 = 10.31 = 11.84
Total assets turnover = sales/net total asset

For
2020 2021 2022
195732/97715 207476/82013 227186/94311

= 2.003 = 2.53 = 2.41
Average collection period = account receivable/sales x 360

For
2020 2021 2022
30970/195732 x 56.96 18442/207476 x360 20194/227186x360

= 56.96 = 32 = 32
Net Profit margin (%) =net income / revenue

For
2020 2021 2022
873/195732 6400.43/207476 12510.3/227186

= 0.45% = 3.08% = 5.51%
Gross profit margin (%) = gross profit / net sale x 100 %

For
2020 2021 2022
64
29090/195732 36308.3/207476 45437.2/227186
= 14.86% = 17.5% = 20 %
Return on total assets = net income / total asset

For
2020 2021 2022
873 / 97715 6400.43/82013 12510.3/94311

= 0.89% = 7.80% = 13.26%s
Return on owner equity = net income/owner euity

For
2020 2021 2022
873 / 40250 6400.43/ 45050 12510.3/ 54433

= 2.17 % = 14.21% = 22.98%
If all the short-term loans are repaid at the end of first half of 2021, the company would be able
to pay its regular dividends in 2021 as well as in 2022.
The minimum cash balance required at the end of 2021 is 10374(5% of 207476 of projected sales
of 2021). The company after paying the dividend of 25% during the year 2021 has the left cash
balance of 8774. So, the company will not be able to maintain the minimum cash balance.
Similarly, the minimum cash balance required at the end of 2022 is 11359. The company after
paying the dividend of 25% during the year 2022 has left the cash balance of 8239. So , the
company will not be able to maintain minimum cash balance.
Since, after the payment of short-term loan all the ratios of the company are improving. We can
find that there is no situation that indicates poor financial status.
65
66
Analysis of Ratios:
A. Liquidity ratio
Current ratio:
The revised current ratio is expected to be increased in 2021 and 2022. It will be 2.45 times
which is below average industry level and 2.64 times which is above average industry level. So,
in 2021 their performance is expected to be below average but in 2022 their performance will be
good.
2.5
1.5
0.5
0
2020 2021 2022
CR Industry Avg
Figure 31: Revised current ratio
Quick ratio: The revised quick ratio is expected to be increased. It will be 1.26 times and 1.52
times in year 2021 and 2022. It will be higher than average industry level which shows that the
performance of the company is good.
1.6
1.4
1.2
0.8
0.6
0.4
0.2
0
2020 2021 2022
QR Industry Avg
Figure 32: Revised quick ratio
67
B. Leverage Ratio
Debt Ratio:
The revised debt ratio will be decreased in upcoming years. In 2021 and 2022 debt ratio is
expected to be 45.07% and 42.28%. So, they are below the average industry level which is good
for Silver River Manufacturing. It will increase profit because using less amount of debt will lead
to fewer amounts of interest expenses.
60
50
40
30
20
10
0
2020 2021 2022
DR Industry Avg
Figure 33: Revised debt ratio
Times Interest Earned Ratio:
The revised time interest earned ratio is expected to increase in 2021 and 2022. In 2021, it is
expected to be 4.57 which shows that their performance will be below average but in 2022, it
will be 8.23 which is more than average industry level and it indicates that their performance will
be good.
0
2020 2021 2022
TIE Industry Avg
68
Figure 34: Revised time interest earned ratio
C. Asset Management Ratio
Inventory turnover ratio:
The revised inventory turnover ratio is at the average industry level in year 2021 and 2022. This
shows that performance of the company will be good in upcoming years.
0
2020 2021 2022
IT Industry Avg
Figure 35: Revised inventory turnover ratio
Fixed assets turnover:
The revised fixed assets turnover ratio is expected to be below the average industry level in year
2021 and 2022 i.e., 10.31 and 11.84. This shows that the company is not fully utilizing resources
which means this will show poor performance of the company in the future.
12.5
12
11.5
11
10.5
10
9.5
9
2020 2021 2022
FAT Industry Avg
Figure 36: Revised fixed assets turnover ratio
69
70
Assets Turnover:
The revised total assets turnover ratio of the company is projected to be increased in 2021 and
2022. The projection is still below than average industry level i.e., 2.53 in year 2021 and 2.41 in
year 2022. So, this reflects poor performance of the company.
2.5
1.5
0.5
0
2020 2021 2022
ATR Industry Avg
Figure 37: Revised assets turnover ratio
Average Collection Period:
The revised average collection period which is 32 in 2021 and 32 in 2022 will be at average
industry level. This shows good performance of the company.
60
50
40
30
20
10
0
2020 2021 2022
ACP Industry Avg
Figure 38: Revised average collection period
71
D. Profitability Ratios
Net profit margin:
The revised net profit margin is expected to be increased in year 2021 and 2022 i.e., 3.08% and
5.51%. In 2021 and 2022, the net profit margin will be above average industry level which
shows good performance from the company.
0
2020 2021 2022
NPM Industry Avg
Figure 39: Revised Net Profit Margin
Gross Profit Margin:
The revised gross profit margin will be higher than average industry level in 2022 i.e., 20%. This
shows good performance of the company.
20
18
16
14
12
10
0
2020 2021 2022
GPM Industry Avg
Figure 40: revised gross profit margin
72
Return on total assets
The revised return on assets is also expected to be increased in 2021 and 2022. In 2021, it will be
7.80% and 13.26% in 2022, which is higher than average industry level. This shows good
performance of the company.
14
12
10
0
2020 2021 2022
ROTA Industry Avg
Figure 41: revised return on total assets
Return on owners’ equity
The revised return on equity will increase in year 2021 and 2022. In 2022, it will be higher than
average industry level which reflects good performance of the company.
25
20
15
10
0
2020 2021 2022
ROE Industry Avg
Figure 42: revised return on owner’s equity
Overall, the revised financial ratio for the year 2021 and 2022 shows better improvement of the
firm’s financial performance.
73
Du Pont Analysis (Revised)
Du Pont analysis is a useful technique used to decompose the different drivers of return on equity
(ROE). The decomposition of ROE allows investors to focus on the key metrics of financial
performance individually to identify strengths and weaknesses.
Table 13: Revised Du Pont Analysis
Particulars ROE = NPM × TAT × EM

2020 2.17% = 0.45% × 2.00 × 2.43
Comment Poor Poor Poor Risky
2021 14% = 3% × 2.53 × 1.83
Comment Poor Ok Poor Ok
2022 23% = 6% × 2.41 × 1.73
Comment Good Good Poor OK
Working Note
Equity Multiplier = Total Assets / Total Shareholder’s Equity
For 2020=97715/40250=2.43
For 2021=82023/45050=1.82
For 2022=94311/54433=1.73
According to Du Pont analysis, we found that revised return on equity of SRM will be improved
in 2021 and 2022 as compared to 2020, which shows the improvement of Net profit margin,
Asset turnover and Equity multiplier. This shows improvement in financial position of SRM
after revising financial policy.
74
Figure 43: Revised Return on Equity
Altman Z Factor
This concept may be used to predict the profitability that a firm will go into bankruptcy within
two years. Z-scores are used to predict corporate defaults and an easy-to-calculate control
measure for the financial distress status of companies in academic studies. It measures the
financial health of a company. Bankruptcy is the legal proceeding involving a person or business
that is unable to repay outstanding debts. This can be calculated as:
Z = 0.012X1+0.014X2 + 0.033X3 + 0.006X4 + 0.999X5

Where,
If Z> 2.99 , it represent ‘Safe’ Zone
If 1.81 < Z < 2.99 , it represent ‘Grey’ Zone
If Z < 1.81 ,it represent ‘Distress’ Zone
75
Table 14: Projected Altman Z score

0. 4 49.
X1 = Working Capital / Total Assets 50 4.61 52
0. 5. 9.
X2 = Retained Earnings/ Total Assets 19 85 95
0. 1 2
X3 = EBIT/Total Assets 32 6.65 5.17
X4 = Market Value of Equity / Book Value of Total
Liabilities 0.0007 0.95 2.04
3. 1. 2.
X5 = Sales / Total Assets 00 94 41
3.1
Z-Score (Distress < 1.81 < Grey < 2.99 < Safe) 2.00 2.85 4
Working Notes:
For 2020:
81533−45562
X1 =
97715
×100% = 36.8%
X2= ( 16980
97715 )
×100 % = 17.37%
4445
X3= ×100 % = 4.54%
97715
X4=
= 57465 = 0.07
where,

no. of shares=
par value per share
= 1 = 23270 shares
Net Income 873

MPS
P/E Ratio= EPS
76
= 4.6×0.037516
= 23270×0.1726
= 4015.79
195732
X5 =
97715
= 3.06
For 2021:
61880−25296
X1 =
82013
×100% = 44.61%
X2= ( 82013
4800
) ×100 % = 5.85%
13656
X3= ×100 % = 12.80%
82013
MarketValueofEquity
X4=
= 35202.36
36962
= 0.95%
where,

no. of shares=
par value per share
= 1 = 23270 shares
Net Income 6400.43

MPS
P/E Ratio= EPS
77
= 5.5×0.2751
=Rs. 1.5128per share
= 23270×1.5128
= 35202
207476
X5 =
82013
= 2.52
For 2022:
75124−28421
X1 =
94311
×100% = 49.52%
X2= ( 9382.7
94311 )
×100 % = 9.95%
23734.4
X3= × 100 %= 26.22%
94311
MarketValueofEquity 81315
X4= =
BookValueofTotalLiabilities 39878
= 2.04%
where,

no. of shares=
par value per share
= 1 = 23270 shares
Net Income 12510

MPS
P/E Ratio= EPS
= 6.5×0.5376
78
= 23270×3.1696
= 73755.5
227186
X5 =
94311
= 2.41
Z Score
3.50
3.97
3.00 3.69
2.50
2.00
2.00
1.50
1.00
0.50
-
2020 2021 2022
Figure 44: Revised Altman z score
Here, since the Altman z-score in the above chart in 2021 and 2022 is higher than 3 which refers
to safe zone, the banker (MNCB) can provide loan to the silver river company.
79
ISSUE 6
On the basis of your analyses, do you think the bank should:

 Extend the existing short-and long term loans and grant additional $6000000 loan,
or
 Extend the existing short and long term loans without granting the additional loan,
or
 Demand immediate repayment of both existing loans?
If your favor (a) or (b) above, what conditions (collateral, guarantees, or other
safeguards) should the bank impose to protect itself on the loans?
Marion County National Bank has long provided loan facilities to Silver River Manufacturing
Company (MCNB). SRM and MCBN had a good relationship until recently. SRM has always
paid its bank on time, which is the main reason for their good relationship, but SRM is currently
experiencing financial difficulties.
MCNB examined the SRM's current financial status using their computer software, which
revealed that the SRM is currently experiencing financial difficulties and may go bankrupt.
According to bank policy, such customers should be called to repay all facilities or loans services
provided by the bank.
According to our findings, it would benefit both the bank and the company if the bank extended
the existing short- and long-term loans and granted the additional $6,00,000 loans. The reasons
listed below help to support our advice:
 SRM's past performance has been considered as efficient, as SRM pays due amounts on
time, indicating the company's good reputation in the market and recognized the SRM
company to have a good long run prospect.
 SRM's current problems are not entirely a result of operational failure. Instead, it is due to
various complications such as the market's financial recession and an unexpected change
in climatic conditions that already have reduced demand for its products available in the
market.
80
 SRM has also stated its intention to repay its loan. Mr. White had also signed a contract
for the expansion of the plant. He also aims to decrease administrative, selling, and other
expenses over the next two years, implying that the company's financial position will
improve substantially over the next two years.
 The average sales growth rate for 2021 and 2022 is projected to be 6% and 9.5 percent
respectively, supposing no considerable improvement in the national or industry
economies. This circumstance is also likely to increase their chances of making the debt
payment.
 In increasing order, the fixed asset turnover ratios for 2018, 2019, and 2020 are 11.51,
11.98, and 12.10, respectively. Furthermore, its ability to generate sales from its assets is
more convenient than the industry. This demonstrates that fixed assets are efficiently and
successfully used to generate sales.
 SRM's Altman Z-score is 2.01, which is in line with the industry average for 2020, which
ranges between 1.81 and 2.99, and is classified as being in the "Gray Zone." It is
impossible to predict with certainty whether SMC will succeed or fail.
 Given the likelihood that SRM will eventually be able to meet its financial obligations,
assuming the projected ratios come true in the future, these ratios exceed the bank's
contractual requirements.
Based on our analysis, we can guarantee that if SRM invests in new facilities, it will be able
to generate enough profit within two years to meet the bank's entire obligation. One more
reason is that the company has a strong growth prospect and solid projected financial figures,
so the bank should not end its relationship with the company because of temporary issues.
And, based on the current state of SRM, they appear to be quite capable of repaying their
short-term loan.
81
ISSUE 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?
If the Silver River Manufacturing Company's financial performance raises any concerns for
Marion County National Bank (MCNB). The bank may then take legal action against SRM
Company to require it to immediately return its two outstanding loans, a short-term loan and a
long-term loan, as well as to remove the whole credit line. The SRM company may experience
challenging cash constraints in this case. In order to raise the necessary capital for the firm, SRM
Company can employ a variety of financing strategies.
 Equity Financing:
To collect capital funds and manage the current problem, the silver river manufacturing
company can issue an additional number of shares of common stock. SRM can produce some
Cash that can be used to repay both long and short-term loans.
 Sales of Assets
To repay the existing loan, the company can sell the ideal fixed assets. SRM is capable of
Sell the organization's unique resources to help pay off the loan.
 Create effective collection strategies
The company's collection procedures must be tightened. In this manner, the borrowers will
make payment on time. SRM is adopting liberal collection methods in this case.
 Reschedule Account Payable Period
Account payable payments may be delayed by the SRM. It manages the company's cash
outflows.
 Dividend Termination
SRM companies can suspend cash dividends for a set period of time in order to manage cash
balances, and those funds could be used to repay a bank loan.
82
 The use of trade credit financing
A trade credit is a business-to-business (B2B) agreement in which a customer can purchase

goods on account without paying cash up front, instead paying the supplier at a later date.
When it comes to short-term financing and trade credit, the term credit term is frequently
used. The Credit terms specify the credit period, cash amount, and discount offer, among
other things, and they can be useful to SRM. By foregoing discounts, the company can fund
short-term financing. It can also be stretched the number of days to accounts payable that is
trade credit, due to which SRM Company can Use those funds to get out of debt.
 Financial Institution Lending
SRM Company may access capital by entering into a credit agreement with another financial
institution because SRM has a significant amount of fixed assets and a large volume of stock.
It can borrow by keeping them as collateral for a loan and paying NCMB.
83
ISSUE 8
Explain some of the lessons learnt from the case:
Following a thorough analysis of the Silver River Manufacturing Company case, the following
lessons have become clear to us:
1. Determine the financial ratios and assess them
The total financial position of a corporation can be examined using financial ratios. For the
company's financial side, it serves as a mirror. We learned how to use several measures to
analyze a company's liquidity position, solvency position, profitability, and leverage position,
how to understand data, and how it aids in corporate decision-making.
2. Comprehend the financial situation of the company
A company's financial conditions are of a major concern to investors and creditors. As

sources of finance for your company operations, investors and creditors rely on financial
reports to gauge conditions for both the safety and profitability of their investments.
3. Recognize crucial factors that must be taken into account when applying for a bank
loan
Banks consider your company's history of repaying debt, your business references, the
caliber of your goods or services, and your reputation. Your personal credit history is a great
indicator of your ability to repay a company loan as a business owner. All these are the
factors we must consider before applying for bank loan.
4. Application of pro forma statements
Pro-forma earnings refer to a financial statement that includes estimations or hypothetical

values to provide a "picture" of a company's profits if particular nonrecurring factors were
eliminated. Pro Forma statements can be used to examine potential outcomes as well as
estimate future growth rates.
84
5. Implement the Du Pont system
DuPont analysis is a useful technique used to decompose the different drivers of return on
equity (ROE) for a business. This allows an investor to determine what financial activities
are contributing the most to the changes in ROE.
6. Learn about the use of Altman z-score
The Altman Z-score is a formula for determining whether a company, notably in the
manufacturing space, is headed for bankruptcy. The formula takes into account profitability,
leverage, liquidity, solvency, and activity ratios. We’ve learnt to assess and determine the
likelihood that the company would go bankrupt using Z-score for Altman.
7. Managerial decision-making capability
A manager should never be overly optimistic about their endeavors; instead, they should
regularly calculate the ratios, monitor the company's financial health, and apply corrective
measures as soon as possible to avoid future difficulty. Which we have got from this case
85
Conclusion
Silver River Manufacturing Company (SRM) is an American corporation. The stock of this
company is traded over the counter. SRM is a significant regional producer of farm and utility
trailers. Examples of lives include stock carriers and mobile home chassis. More than 85% of
SRM's sales are generated by The United States' southernmost region. Even though it is unable
to meet the contractual financial ratio, this company has been a good customer of Marion
Country National Bank (MCNB). Lesa Nix, MCNB's Vice-President, has sent an alert phone call
to SRM's founder and president, Greg White.
It is obvious from the SRM's prior performance that it is an effective company that pays the
required amount on time and also exhibits a strong reputation in the market. SRM is thought to
have a promising future. And it is clear that the issues that SRM is currently dealing with are not
just due of its operational shortcomings. Reasonably, it is brought about by unforeseen events
such as The market's financial downturn (recession) and the unanticipated climate change
situations that decreased consumer demand for its products. SRM has a commitment to the loan's
repayment.
Additionally, Mr. White had signed a contract for a plant expansion, which from the standpoint
of profit generation transformed his company into a mobile chassis. It has changed from a
strategy of aggressive sales promotion to one that uses full margin prices, industry-standard
lending terms, and stricter credit standards resulting in a decrease in the cost of items sold.
Additionally, he intends to decrease an expenses for selling, administration, and other items
during the next two years. This demonstrates that over the following two years, the company's
financial status may dramatically improve.
According to our analysis of the situation, extending the current short-term and long-term loans
as well as approving the additional $6,000,000 loans would be advantageous for the bank and the
company. The historical performance of SRM is one of the many reasons we have to support it.
When SRM pays the required amount on time, it has been acknowledged as effective. This
displays the positive reputation the SRM Company has in the market and is thought to have long-
term possibility.
86
Similar to this, SRM's current issues are not just the result of operational failure; they also result
from unavoidable events like the financial slump in the market and the unanticipated change in
the meteorological conditions that decreased the demand for its products in a marketplace. SRM
has agreed to pay back the debt in this instance.
Additionally, Mr. White has signed a contract for a plant expansion, and he also has plans to cut
back on selling, administrative, and other expenses over the next two years, demonstrating that
the company's plans are on track. Over the next two years, the financial situation could
drastically improve as we discovered. Assuming sales will grow at an average rate of 6% and
9.5% in 2021 and 2022, respectively. The economy of either the country or the sector has not
significantly improved. Furthermore, this condition increases their chances of making the loan
payment.
87
Reference
 Pradhan, R.S. (2014). Financial Management

 https://www.investopedia.com/terms/c/covenant
 https://en.m.wikipedia.org
 https://www.studocu.com
 https://www.support.bull.com
88

Silver River Case Analysis

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Silver River Case Analysis

Uploaded by

Copyright:

Available Formats

CASE ANALYSIS

Date: July 26, 2022

Dr. Radhe Shyam Pradhan

CERTIFICATE FROM THE SUPERVISOR..............................................................................ii

Table 1: Statement of changes in Financial Position of..................................................................4

Figure 1: Current ratio.....................................................................................................................9

SRM- Silver River Manufacturing

Statements) or complete Table 6.

 Operating (including sales, inventories, accounts receivable and accounts payable)

Table 1: Statement of changes in Financial Position of

Silver River Manufacturing Company.

Year Ended December 31

Particulars 2019 2020

Analysis of changes in working capital:

Increase (decrease) in current assets

2018 2019 2020

Table 2: Ratio Analysis

Ratio Analysis year ended December 31

Liquidity ratio of an organization calculates an ability of organization to pay current liabilities.

Current Ratio Quick ratio

Figure 1: Current ratio

ii. Quick Ratio

Quick Ratio Industrial Average

Figure 2: Quick ratio

Debt Ratio Industrial Average

Figure 3: Debt ratio

i. Times Interest Earned Ratio

Time Interest earned Industrial Average

Figure 4: Time Interest Earned

Assets Management Ratio:

i. Inventory Turnover (Cost)

Inventory Turnover Industry Average

Figure 5: Inventory Turnover Ratio (COGS)

ii. Inventory Turnover (Sale)

Inventory turnover (sale) is calculated to see if a company has an excessive inventory in

Inventory Turnover(Selling) Industry Averaage

Figure 6: Inventory Turnover Ratio

iii. Fixed Assets Turnover

Fixed Assets Turnover Industry Average

Figure 7: Fixed Assets Turnover Ratio

iv. Total assets turnover

Total Assets Turnover Industry Average

Figure 8: Total Assets Turnover Ratio

iv. Average Collection Period

Average Collection Period Industry average

Figure 9: Average Collection Period

1.4 Profitability Ratio

Net Profit Margin Industry Average

Figure 10: Net Profit Margin

ii. Gross Profit Margin

Gross Profit Margin Industry average

Figure 11: Gross profit Margin

iii. Return on Total Assets

Return on Total Assets Industry Average

Figure 12: Return on Total Assets

iv. Return on owners’ equity

Return on Equity Industry Average

Figure 13: Return on Equity

 Operating efficiency as measured by net profit margin.

Table 1: Calculation of ROE

Figure 14: Return on equity

Potential failure indicator