Access the Company Future Health

November 4, 2017 Health

Assessing a Company’s Future Financial Health Submitted on September 6, 2011 SECTION 1: Sales Growth 1. During the four-year period ended December 31, 2008. SciTronics’ sales grew at 21% ($244,000/$115,000) = (1+r) ^4 compound rate. There were no acquisitions or divestitures. Profitability Ratios: How Profitable Is the Company 1. SciTronics’ profits as a percentage of sales in 2008 were 5. 73% (14,000/244,000). 2. SciTronics’ profits as a percentage of sales in 2005 was 3. 44 %( 5,000/147,000). This represents an increase of 2. 29% from 2005. 3.

SciTronics had a total of $112, 000 (75,000+20,000+7,000+10,000) of capital at year-end 2008 and earned before interest but after taxes (EBIAT) 16,000 (26,000-10,000) during 2008. Its return on capital was 14. 29% (16,000/112,000) which represents an increase from the 8. 11% (6,000/74,000) in 2005. 4. SciTronics had $75,000 of owner’s equity and earned $14,000 after taxes in 2008. Its return on equity was 18. 66% ($75,000/$14,000) an improvement from the 8. 1% ($5,000/$61,000) earned in 2005. Activity Ratios 1. Total Assets turnover for SciTronics in 2008 can be calculated by dividing $244,000 (net sales) into $159,000 (total assets).

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The turnover decreased from 1. 58 times in 2005 to 1. 53 in 2008. 2. SciTronics had $66,000 in accounts receivables at year end 2008. Its average sales per day were $668. 49 ($244,000/365) during 2008 and its average collection period was 98. 73 ($66,000/668. 49). This represents an improvement from the average collection period of104. 29 ($42,000/402. 73) days in 2005. 3. SciTronics apparently needed $29,000 (inventories in 2008) of inventory at year end to support its operations during 2008. Its activity during 2008 as measured by the cost of goods sold was $74,000 (COGS).

It therefore had an inventory of turnover of 2. 55 (74,000/29,000) times. This represents an improvement from 2. 04 (43,000/21,000) times in 2005. 4. SciTronics had net fix assets of $18,000 (net fix assets) and sales of $244,000 in 2008. Its fixed asset turnover ratio in 2008 was 13. 56 (244,000/18,000), a deterioration from 16. 33 (147,000/9,000) in 2005. Leverage Ratios: How Soundly Is the Company Financed? 1. SciTronics’ ratio of total assets divided by owners’ equity increased from 1. 52 (93,000/61,000) at year end 2005 to 2. 12 (159,000/75,000) at year-end 2008. 2.

At year-end 2008, SciTronics’ total liabilities were of its total assets was 52. 83% (48,000+7000+20000+9000/159000), which compares with 34. 4% (21,000+11,000)/93,000). 3. The market value of SciTronics equity was $175,000,000 at December 31, 2008. The total debt ratio at market was 32. 4% (84,000/84,000+175,000). 4. SciTronic’s earnings before interest and taxes (operating income) were $26,000 in 2008 and its interest charge were $2,000. Its times interest earned were 13 times. This represents an improvement from the 2005 level of 10 times. 5. SciTronics owed its supplies $6,000 at year end 2008.

This represents 8. 1 percent (6,000/74,000) of cost of goods sold and was a decrease from 11. 63% (5,000/43,000) at year end 2005. The company appears to be more prompt in paying its suppliers in 2008 than it was in 2005. 6. The financial riskiness of SciTronics decreased between 2005 and 2008. Liquidity Ratios: 1. SciTronics held $133,000 of current assets at year-end 2008 and owed $48,000 to creditors due to be paid within one year. Its current ratio was 2. 77 (133000/48000), a decrease from the ratio of 3. 90 (82000/21000) at year-end 2005. 2. The quick ratio for SciTronics at year end 2008 was 2. 6 (133,000-29,000)/48,000), a decrease from the ratio of 2. 90 (82,000-21,000/21,000) at year-end 2005. Profitability Revisited 1. The improvement in SciTronics’ return on equity from 8. 2% in 2005 to 18. 7% in 2008 resulted from an increase in its return on sales; and an increase in its assets turnover, and an increase/decrease in its assets turnover, and an increase in its financial leverage. SECTION 2: Questions to Consider 1. What is your assessment of the performance of SciTronics during the 2005-2008 periods? In looking at the firms’ assessment from 2005 to 2008, it can be concluded that the firm experienced rapid growth.

First, in terms of sales, the firm sales grew great by 21% from 2005 to 2008. In addition, the firm profits as a percentage of sales increased by 2. 29% from 2005 to 2008. This means that firm has demonstrated its ability to increase its revenue while reducing its cost. Second, the firm saw its return on equity increased from 8. 11% in 2005 to 18. 66% increase. This is an increase of 10. 56%. This means that shareholders are more satisfied and the company is able to earn more profits with shareholder’s invested money. In terms of the firm’s activity ratios, the turnover decreased from 1. 8 times in 2005 to 1. 53 in 2008. This decrease was due to the large growth in assets over the past 4 years. Although the assets increased by 66 million over the past 4 years, the turnover only decreased by . 05. The firm saw an improvement in its average college period and inventory turnover. Its average collection period decreased from 104. 29 in 2005 to 98. 73 in 2008 and its inventory turnover increased from 2. 04 in 2005 to 2. 55 in 2008. These ratios further confirm the firm’s strong sales. 2. Has its financial strength and its access to external sources of finance improved or weakened.

The firm’s financial strength has weakened from 2005 to 2008. After analyzing the firm’s leverage ratios, it was found that the growth of the firm’s liabilities was greater than the growth of its assets. At year-end 2008, the firm’s total liabilities were 52. 83% of its total assets, which compares with 34. 4% in 2005. 3. What are the 2-3 most important questions you would ask management as the result of your analysis? 1? How to control the ration of liabilities to the asset, though it is still in a good level? 2? The current ratio or quick ratio both have a remarkable decrease, 3? Will the ratio of return on equity keep growing?

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