Avery Products Case Study
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Avery Products
(Financial Analysis)
Robert Eng, 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, Avery Products, Inc., by his banks 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 punched on cards and 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 had been run on Avery Products three months earlier, Eng had noticed that some of the companys ratios were showing downward trends, dipping below the averages for the jewelry manufacturing industry. Eng had sent a copy of the computer output, together with a note voicing his concern, to John Avery, president of Avery Products. Although Avery had acknowledged receipt of the material, he had taken no action to correct the situation.
The first financial analysis indicated that some problems were developing, but no ratio was below the level specified in the loan agreement between the bank and Avery Products. However, the second analysis, which was based on the data given in Tables 1, 2, and 3, showed that the current ratio was below the 2.0 times specified in the loan agreement. According to the loan agreement, the Cincinnati Bank could legally call upon the company for immediate payment of the entire bank loan, and if payment was not forthcoming within 10 days, the bank could force Avery Products into bankruptcy. Eng had no intention of actually enforcing the contract to the full extent that he could legally, but he did intend to use the loan agreement provision to prompt Avery Products to take some decisive action to improve its financial picture.
Avery Products is a company that manufactures a complete line of costume jewelry products. In addition to its regular merchandise, Avery creates special holiday items for the Christmas season. Seasonal working capital needs have been financed primarily by loans from the Cincinnati Bank, and the current line of credit permits the company to borrow up to $300,000. 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 1999.
TABLE 1
AVERY PRODUCTS, INC.
BALANCE SHEET
YEAR ENDED DECEMBER 31
1988
1994
1995
1996
$ 41,000
$ 61,000
$ 28,600
$ 20,400
Accounts receivable
163,000
245,000
277,400
388,000
Inventory
204,000
306,000
510,000
826,200
Total current assets
$408,000
$612,000
$ 816,000 $1,234,600
Land and building
61,000
49,000
130,600
122,400
Machinery
81,600
151,000
118,300
102,000
Other fixed assets
49,000
28,600
8,200
6,100
Total assets
$599,600
$840,600 $1,073,100 $1,465,100
Notes payable, bank
102,000
286,000
Accounts and notes payable
90,000
98,000
155,000 306,000
Accruals
40,800
49,000
57,000
77,500
Total current liabilities
$130,800
$147,000 $ 314,000 $ 669,500
Mortgage
61,000
45,000
40,800
36,700
Common