Question
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
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?
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