Roger Elliot, vice president and loan officer of the First National Bank of Cincinnati, was recently alerted to the deteriorating financial position of one of his clients, Seal-best, Inc., by his bank's newly instituted computer loan-analysis program. The bank requires quarterly financial statements - balance sheets and income statements - from each of its major loan customers. This information is fed into the computer, which then calculates the key ratios for each customer, charts trends in these ratios, and compares the statistics of each company with the average ratios and trends of other firms in the same industry. If any ratio of any company is significantly poorer than the industry average, the computer output makes note of this fact. If the terms of a loan require that certain ratios be maintained at specified minimum levels and these minimums are not being met by a company, the computer output notes the deficiency.

When an analysis was run on Seal-best three months earlier, Elliot noticed that some of the company's ratios were showing downward trends, dipping below the averages for the dairy products industry. Elliot sent a copy of the computer output, together with a note voicing his concern, to Eric Swenson, president of Seal-best. Although Swenson acknowledged receipt of the material, he took no action to correct the situation.

• 1) Calculate the key financial ratios for Seal-best, Inc., and plot trends in the firm's ratios against the industry averages.
• 2) What strengths and weaknesses are revealed by the ratio analysis?
• 3) What amount of internally-generated funds would be available for the retirement of the loan? If the bank were to grant the additional credit and extend the increased loan from a due date of February 1 to June 30, would the company be able to retire the loan on June 30? (Hint: To answer this question, consider profits and depreciation as well as the amount of inventories and receivables that would be carried if Seal-best's inventory turnover and average collection period (Days Sales Outstanding) were at industry average levels, that is, generating funds by reducing inventories and receivables to industry averages.)
• 4) In 2018, Seal-best's return on equity was 5.38 percent, versus 18 percent for the industry. Use the duPont equation to pinpoint the factors causing Seal-best to fall so far below the industry average.

5) On the basis of your financial analysis, do you believe that the bank should grant the additional loan and extend the entire line of credit to June 30?

YEAR ENDED DECEMBER 31

	2015		2016	2017	2018
Cash	$ 34,000		$ 51,000	$ 23,800	$ 17,000
Accounts Receivable	136,000		204,000	231,200	323,000
Inventory	170,000		255,000	425,000	688,500
Total Current Assets	$ 340,000		$ 510,000	$ 680,000	$ 1,028,500
Land and Building	51,000		40,800	108,800	102,000
Machinery	68,000		125,800	98,600	85,000
Other Fixed Assets	40,800		23,800	6,800	5,100
Total Assets	$ 499,800		$ 700,400	$ 894,200	$ 1,220,600
Notes Payable, bank	---		---	85,000	238,000
Accounts and Notes Payable	74,800		81,600	129,200	255,000
Accruals	34,000		40,800	47,600	64,600
Total Current Liabilities	108,800		122,400	261,800	557,600
Mortgage	51,000		37,400	34,000	30,600
Common Stock	306,000		306,000	306,000	306,000
Retained Earnings	34,000		234,600	292,400	326,400
Total Liabilities & Equity	$ 499,800		$ 700,400	$ 894,200	$ 1,220,600

SEAL-BEST, INC. INCOME STATEMENT

	2016	2017	2018
Net Sales	$ 2,210,000	$2,295,000	$2,380,000
Cost of Goods Sold	1,768,000	1,836,000	1,904,000
Gross Operating Profit	442,000	459,000	476,000
General, Administrative, Selling	170,000	187,000	204,000
Depreciation	68,000	85,000	102,000
Miscellaneous	34,000	71,400	102,000
EBT	170,000	115,600	68,000
Taxes (50%)	85,000	57,800	34,000
Net Income	$ 85,000	$ 57,800	$ 34,000

Quick Ratio Current Ratio Inventory Turnover Average Collection Period Fixed Asset Turnover (b) Total Asset Turnover (b) Return on Total Assets Dairy Products Industry Ratios (2018) (a) 1.0 2.7 7 times 32 days 13.0 times 2.6 times 9% Quick Ratio Current Ratio Inventory Turnover Average Collection Period Fixed Asset Turnover (b) Total Asset Turnover (b) Return on Total Assets Dairy Products Industry Ratios (2018) (a) 1.0 2.7 7 times 32 days 13.0 times 2.6 times 9%