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Assessing A Company Future Financial Health

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Question:

Describe about Assessing a Company"s Foture Financial Health?

 

Answer:

Assessment of the performance of SciTronics

Ratios

2005

2008

Net Profit/Net Sales

3.4

5.7

Return to Capital

-8.19

9.33

Return on Equity

8.19

18.6

Sales/Total Assets

1.58

1.53

Collection period (days)

98.11

95.05

Days of Inventory

178

173

Sales/Net property and equipment

16.3

13.55

Total Assets/ Equity

1.52

2.12

Total Liabilities/Total Assets

0.34

0.528

Interest-bearing debt/Total Capital

0.14

0.26

Times Interest Earned

10

13

Current Assets/Current Liabilities

3.9

2.77


It can be understood from the above calculate ratios that performance of SciTronics is quite well in 2008 in comparison to 2005. The income statement and balance sheet of SciTronics shows that company can be able to increase in earnings in coming future that could help the company in meeting the expectation of the service users.

Assessment of SciTronics financial strength

It can be noted down from the income statement, balance sheet and evaluated different ratios that financial strength or position of the medical device company, SciTronics has improved. In 2005, company had only $93000 worth of total assets whereas in 2008, they have $159000 of assets. Therefore, it shows that company is able to acquire advanced equipment for their medical service which helped in meeting the earlier debts (Edwards & Boyns, 2012). Moreover, the profit margin of the company increased to 5.7% in 2008 as against to 3.4% in 2005. The company also registered growth in the sales of $244000 in 2008 which was $147000 in 2005. On the other hand, the interest expense in constant from 2006 to 2008 which helped in improving the net income from $5000 to $14000. The return of capital which was negative in 2005 significantly improved and increased in 2008. Therefore, it shows that company is able to generate better return from their investment (Epstein & Lee, 2012). Apart from that, the collection period represents that there is not much difference in collecting amount from debtors. In 2005 it was almost 98 days whereas in 2008 it was 95 days. Therefore, company takes quite long time to collect the money for the service given on credit.

The current ratio is considerably good in both periods. Although, in 2005, the company was more capable of clearing their debts than in 2008 but in both years, company is able to maintain the standard current ratio of 2:1. Therefore, company is able to clear their bills on time which shows a better operational efficiency of the company (Horngren, Harrison & Oliver, 2012). On the other side, the equity ratio of the company is good in 2008 than in 2005. The investment in the asset has resulted beneficial for the company and is able to increase their sales and income. The liabilities to assets ratio shows that 34% of the company is liabilities in 2005 where in 2008 it increased to 53%. Therefore, it can be assumed that company might have taken higher loan in order to expand their business and due to that liabilities percentage would have increased (Accountingformanagement.org, 2015). Moreover, the time interest earned ratio of the company shows that company is able to pay of its debt well in 2008 than in 2005. Therefore, overall it can be concluded that performance of the company, SciTronics have enhanced from the past years.

Question to management and information for second analysis

The question that could be asked to the management can relate with the:

  • Why your current ratio has dipped down in 2008?

  • What are the steps taken by you to improve the average collection period?

  • Why you have so high percentage of liabilities in comparison to 2005?

The other information that would be useful for doing the second analysis can know the outstanding shares that the company holds so that it can help in measuring the value of the company. On the other hand, the earning per share ratio can be effective in knowing how much each shareholder is able to generate income from their investment. Moreover, the overall profitability of the company can be known (Olive, 2012). The cash conversion cycle can be important as it can help in showing the average number of days for the cash that is tied up in the receivables and inventory (John Y. Lee., 2012). Apart from that, the calculation of proprietary ratio is useful in evaluating the effectiveness of capital structure of the company. The price/earnings ratio can help in understanding the market price of the company’s share in context of earnings. On the other hand, cash flow statement has not been provided in the given case. Thus, using the cash flow statement, the cash inflow and outflow or cash balance can be known that can help in understanding the operating activities, financing activities and financing activities (Edwards & Boyns, 2012).

 

Matching five different companies

Ratios

A

B

C

D

E

Net Profit/Net Sales

10.3%

1.5

5.1

1.3

(5.8)

Return to Capital

6.8%

9.2

12.6

0.9

(3.1)

Return on Equity

12.5%

10.8

28.1

2.2

(7.6)

Sales/Total Assets

.32

3.25

1.31

.63

.65

Collection period (days)

52

4

86

232

43

Days of Inventory

43

32

62

31

147

Sales/Net property and equipment

.43

6.7

3.8

2.9

3.6

Total Assets/ Equity

3.73

2.19

4.19

2.79

2.01

Total Liabilities/Total Assets

.73

.54

.76

.66

.50

Interest-bearing debt/Total Capital

59%

19

62

53

32

Times Interest Earned

3.2

16

6.0

4.4

NM

Current Assets/Current Liabilities

.67

1.11

2.01

1.22

1.86

It can be understood from the given balance sheet and financial ratios that performance of Company B is good. The cash percentage of Company B is higher than other companies which provide firm evidence but profit margin of the company is very low. On the other hand, if the financial ratio is to be considered than it can be viewed that profit margin of Company A is higher which places it higher than other companies. Apart from that, if the return on equity is to be taken in account then Company C is better. Therefore, the performance of company A, B and C is almost same except company D and E. On the other hand, if a selection is to be made than Company B is quite better as collection period is very less the percentage of liabilities is also low.

 

References:

Accountingformanagement.org,. (2015). Classification of financial ratios/Major types of accounting ratios | Accounting For Management. Retrieved 7 February 2015, from https://www.accountingformanagement.org/classification-of-financial-ratios/

Edwards, R., & Boyns, T. (2012). A History of Cost and Management Accounting. Hoboken: Taylor and Francis.

Epstein, M., & Lee, J. (2012). Advances in management accounting. Bingley, U.K.: Emerald.

Horngren, C., Harrison, W., & Oliver, M. (2012). Accounting. Upper Saddle River, N.J.: Pearson Prentice Hall.

John Y. Lee.,. (2012). Advances in Management Accounting. Emerald Group Pub.

Olive, C. (2012). Accounting Management. Delhi: University Publications.

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