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 2019.

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 2017 as well as during most of 2018. 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 2019. 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.

	Dairy Products Industry Ratios (2018) (a)
Quick Ratio			1.0
Current Ratio			2.7
Inventory Turnover			7 times
Average Collection Period			32 days
Fixed Asset Turnover (b)			13.0 times
Total Asset Turnover (b)			2.6 times
Return on Total Assets			9%
Return on Equity			18%
Debt (Total) Ratio			50%
Profit Margin on Sales			3.5%
(a) Industry average ratios have been constant for the past three years.
(b) Based on year-end balance sheet figures.

1. 
   
2. 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.

Answer rating: 100% (QA)

ANSWER Ratios Ratios 2016 2017 2018 Quick Ratio 208 097 ... View the full answer