Are they unique to the firm or are they industry wide and may be reflected in lower prices rather than higher profitability? O Are there any “hidden” problems, such as suspiciously high levels or buildups of accounts receivable or inventory relative to sales, or a series of unusual transactions and lord accounting changes? Step 5: Assess Future External Financing Needs Step 6: Ensure Access to Target Sources of External Finance How sound is the firm’s financial structure, given its level of profitability and cash flow, level of business risk, and its future need for finance? How will the firm service its debt? To what extent is it counting on refinancing with a debt equity issue? Does the firm have assured access on acceptable terms to the equity markets? How many shares could be sold and at what price in “good times”? In a period of adversity? What criteria are used by each of the firm’s target sources of finance to determine whether finance will be provided and, if so, on what terms?
The turnover deteriorated from 1. 58 in 2005 to 1. 53 times in 2008. Getronics had $66,000 invested in account receivables at year-end 2008, Its average sales per day were $668. 49 during 2008 and its average collection period was 98. 73 days. This represented an improvement from the average collection period of 104. 29 days 2005. Getronics apparently needed $29,000 of inventory at year- end 2008 to support its operations during 2008. Its activity during 2008 as measured by the Cogs was $74,000 It therefore had an inventory turnover of 2. 5 times.
This represented an improvement from 2. 05 times in 2005. Getronics had net fixed assets of $18,000 and sales of $244,000 in 2008. Its fixed asset turnover ratio in 2008 was 13. 56 times, deterioration from 16. 33 times in 2005 Leverage Getronics’ ratio of total assets divided by owners’ equity increase from 1. 52 at year-end 2005 to 2. 12 at year-end 2008. At year-end 2008, Getronics’ total liabilities were 58. 23% of its total assets, which compares with 34. 41% in 2005. The market value of Getronics’ equity was at December 31, 2008. The total debt Asia at market was . 2. Getronics’ earnings before interest and taxes (operating income) were $26,000 in 2008 and its interest charges were $2,000 Its time’s interest earned was 13 times. This represented an improvement from the 2005 level of 10 times. Getronics owed its suppliers $6,000 at year-end 2008. This represented 8. 10% of cost of goods sold and was a decrease from 1 1. 60% at year-end 2005. The company appears to be more prompt in paying its suppliers in 2008 than it was in 2005. The financial rockiness of Getronics decreased between 2005 and 2008. Liquidity
Getronics held $133,000 of current assets at year-end 2008 and owed $48,000 to creditors, due to be paid within one year. Getronics’ 2008 current ratio was 2. 77, a decrease from the ratio of 3. 9 at year-end 2005. The quick ratio for Getronics at year-end 2008 was 2. 17 a decrease from the ratio of 2. 9 at year-end 2005. Profitability Revisited The improvement in Getronics’ return on equity from 8. 2% in 2005 to 18. 7% in 2008 resulted from an increase/decrease in its return on sales and from an increase/ decrease in its asset turnover, and an increase/decrease in its financial leverage.
