In the case of Assessing a Company’s Future Financial Health, the case concentration is on SciTronics, a medical device company, performance measures based on the organization’s three primary financial data sources in Exhibit 1 & 2. Utilizing the 9 steps of corporate financial system, I will be able to analyze the financial health of the company to assess whether it will remain balance over the ensuing 3-5 years. The measures are grouped by focusing on “Financial Ratios” such as: 1.) profitability measures, 2) activity measures, and 3) leverage and liquidity measures.
Using the financial data sources, I would be able to make recommendations regarding SciTronics 126 million loan request.
Upon the analysis of the financial information, it is recommended to approve SciTronics finance request of $126 million. SciTronics demonstrated an increase in high sales growth of 21%. The increase in sales, increase in inventory turnover and decrease in the average of sale period (how long it takes for company to sell products) demonstrates that SciTronics have increased demands in its products and services.
The total of asset available as collateral would minimize the risk of the loan. Finally, the increase in the return on equity demonstrates that the organizational management is effectively utilizing shareholders’ funds in a profitable manner. To support the recommendation, key financial analysis resulted in:
1. SciTronics performance can be measured as a healthy company due to its demonstrated profitability ratio that increased during the 2005-2008 period. The organization’s profit represented a 2.34% increase from 2005 to 2008. In addition, the increase in return on owners’ equity of 18.67% in 2008 from 8.20% 2005 is demonstrating that SciTronics is utilizing shareholders’ funds in a profitable strategy. The increase in sales growth of 21% also demonstrates that SciTronics have a market base/client group.
2. SciTronics financial strength and its access to external sources of finance improved. The organization increased its financial leverage through increase in sales, which means increase in profitability. Aside from growth in sales, SciTronics improved its accounts receivable period from 104.29 days to 98.73, resulting in ability to convert into cash assets sooner. Key indicators in SciTronics Financial Leverage Ratio showed an improvement in its times interest earned from 10 times to 13 times, an indication how many times they can pay interest from profit. Overall, SciTronics have been strong in increasing its total asset and minimizing total liabilities.
3. Questions that would be ask for management:
Will the company continue to expand their fixed assets such as property and equipment What is the plan to maintain total current liabilities that had been increasing during the period of 2005-2008 What is the plan to maximize asset and increase asset turnover, which decreased from 2005 to 2008
ANALYSIS ($ in thousands)
Sales Growth (Refer to Exhibit 5)
1. During the four year period ended December 31, 2008, SciTronic’s sales growth grew at a 21%. There were no acquisitions or divestitures.
Profitability Ratio: How Profitable is the Company? (Refer to Exhibit 3 and Exhibit 5) 1. SciTronic’s profit as a percentage of sales in 2008 was 5.74%. 2. This represented an increased from 3.54% in 2005.
3. SciTronics had a total of $159,000 of capital at year-end 2008 and earned, before interest but after taxes (EBIAT), $16,000 in 2008. Its return on capital was 13.54% in 2008, which represented an increase from the 7.51% earned in 2005. EBIAT = operating income – income tax = 26,000 – 10,000 = 16,000 4. SciTronics had $75,000 of owner’s equity and earned $14,000 after taxes in 2008. Its return on equity was 18.67%, which represented an improvement from the 8.20% earned in 2005.
Activity Ratios: How Well Does the Company Employs Its Assets? (Refer to Exhibit 6) 1. Total asset turnover for SciTronics in 2008 can be calculated by dividing $244,000 into $159,000. The turnover deteriorated from 1.58 times in 2005 to 1.53 times in 2008. 2. SciTronics had $66,000 in accounts
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 in 2005. 3. SciTronics apparently needed $29,000 of inventory at year-end 2008 to support its operations during 2008. Its activity during 2008 as measured by the cost of goods sold was $74,000. It therefore had an inventory turnover of 2.55 times. This represented an improvement from 2.05 times in 2005. 4. SciTronics 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 Ratios: How Soundly Is the Company Financial? (Refer to Exhibit 7) 1. SciTronics’ ratio of total assets divided by owner’s equity increased from 1.52 at year-end 2005 to 2.12 at year-end 2008. 2. At year-end 2008, SciTronics’ total liabilities were 52.8% of its total assets, which compares with 34.41% in 2005. The market value of SciTronics’ equity was $175,000,000 at December 31, 2008. The total debt ratio at market was 32.43%. 4. SciTronic’s earnings before interest and taxes (operating income) were $26,000 in 2008 and its interest charges were $2,000. Its times interest earned was 13 times. This represented an improvement from the 2005 level of 10 times. 5. SciTronics owed its supplies $6,000 at year end 2008. This represented 8.11% of cost of goods sold and was a decrease from 11.63% at year-end 2005. The company appears to be more prompt in paying its supplies in 2008 than it was in 2005. 6. The financial riskiness of SciTronics decreased between 2005 and 2008.
Liquidity Ratios: How Soundly Is the Company Financial? (Refer to Exhibit 8) 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. SciTronics’ current ratio was 2.77, and decreased from the ratio of 3.9 at year-end 2005. 2. The quick ratio (acid ratio for SciTronics at year-end 2008 was 2.17, a decrease from the ratio of 2.90 at year-end 2005.
1. The improvement in SciTronics’ return on equity from 8.2% to 18.7% in 2008 resulted from an increase in its return on sales; and from a decrease in its asset turnover, and an increase in its financial leverage.
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