SEAL-BEST, INC. Balance Sheet as of 12/31, $ in $000s

Balance Sheet

2015

2018

2019

2020

Cash

34000

51000

23800

17000

Accounts Receivable

136000

204000

231200

323000

Inventory

170000

255000

425000

688500

Total Current Assets

340000

510000

680000

1028500

Land and Building

51000

40800

108800

102000

Machinery

68000

125800

98600

85000

Other Fixed Assets

40800

23800

6800

5100

Total Fixed Assets

159800

190400

214200

192100

Total Assets

499800

700400

894200

1220600

Notes Payable, bank

---

---

85000

238000

Accounts and Notes Payable

74800

81600

129200

255000

Accruals

34000

40800

47600

64600

Total Current Liabilities

108800

122400

261800

557600

Mortgage - Long-term liab.

51000

37400

34000

30600

Total Liabilities

159800

159800

295800

588200

Common Stock

306000

306000

306000

306000

Retained Earnings

34000

234600

292400

326400

Total S.Equity

340000

540600

598400

632400

Total Liabilities & Equity

499800

700400

894200

1220600

Figure 2

Income Statement

2018

2019

2020

Net Sales

2220000

2305000

2390000

Cost of Goods Sold

1768000

1836000

1904000

Gross Operating Profit

452000

469000

486000

General, Administrative, Selling

170000

187000

204000

Depreciation

68000

85000

102000

Miscellaneous

34000

71400

102000

EBT

180000

125600

78000

Taxes (50%)

85000

57800

34000

Net Income

$ 95,000

$ 67,800

$ 44,000

SEAL-BEST, INC. INCOME STATEMENT

Seal-best is a company that handles a full line of dairy products in central and southern Ohio. It produces both fresh dairy products and such storable products as powdered milk and cheese. Seasonal working capital needs have been financed primarily by loans from the Cincinnati Bank, and the current line of credit permits the dairy to borrow up to $240,000. In accordance with standard banking practices, however, the loan agreement requires that the bank loan be repaid in full at some time during the year, in this case by February 2021.

A limitation on dairy products prices, coupled with higher costs, caused a decline in Seal-best's profit margin and net income during the last half of 2019 as well as during most of 2020. Sales increased during both of these years, however, due to the dairy's aggressive marketing program.

When Swenson received a copy of Elliot's latest computer analysis and the blunt statement that the bank would insist on immediate repayment of the entire loan unless the firm presented a program showing how the poor current financial picture could be improved, he began trying to determine what could be done. He rapidly concluded that the present level of sales could not be continued without an increase in the bank loan from $240,000 to $340,000, since payments of $100,000 for construction of a plant addition would have to be made in February 2021. Even though the dairy has been a good customer of the Cincinnati Bank for over 50 years, Swenson began to question whether the bank would continue to supply the present line of credit, let alone increase the loan outstanding. Swenson was especially troubled by the fact that the Federal Reserve recently tightened bank credit, forcing the Cincinnati Bank to ration credit even to its best customers.

Questions:

• 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 2020, Seal-best's return on equity was 6.96 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?
• 6) If the credit extension is not made, what alternatives are open to Seal-best?
• 7) Under what circumstances is the validity of comparative ratio analysis questionable?