EMBA 222 Managerial Accounting
November 3, 2013
Assessing a Company’s Future Financial Health
SciTronics is a medical device company. This financial evaluation will cover the period from 2005 through December 31, 2008. The evaluation will include a review of the profitability, use of assets, and financial leverage metrics.
This company appears to be financially healthy and has shown improvement in many of the metrics reviewed. The company has little long term debt, and adequate cash and owners’ equity balances. However, there are also some metrics that reveal that without some additional adjustments, the growth experienced in the past may not be ...view middle of the document...
The 2008 ROE was 18.7% up by over 200% over the 2005 year ROE of 8.2%.
In all ratios reviewed the indication was positive and in some cases the gains were extremely healthy.
Activity ratios measure how well SciTronics has utilized their assets. There are several metrics to gauge this success (or lack thereof).
Asset Turnover is one of the ratios I have calculated, and in SciTronics case there was a slight decrease in Asset Turnover. This indicates an ineffective use of assets and could result in additional costs to the company and a lower return on capital. However there is another ratio that helps drill down into which assets may be the source of this negative indicator.
One of the more useful categories for this additional information is Accounts Receivable. The ratio used is the Average Collection Period, and it indicates how many days a company waits to collect on Accounts Receivable. The calculations revealed that the Average Collection Period had dropped to 83 days, from 138 days in 2005. This was a positive sign. However, it still did not reveal what the cause might be for the negative asset turnover ratio.
There two more ratios to look at to search for what the root cause might be for the negative return. The Inventory Turnover Ratio was 2.6 for 2008, up from 2.0 in 2005. This data reveals how many times the inventory was sold in the year, and since it was up a bit it did not help us find the cause of the decline. The last metric was the Fixed Asset Turnover Ratio. This ratio helps determine the efficient use of the plant and the equipment. This number was down to 13.6 in 2008, in 2005 it was 16.3. This number reveals an efficient use for the plant and /or equipment. But this ratio is not definitive enough to point to this factor alone as the reason for the decline. Unfortunately, we were not able to determine why 2008 Total asset turnover did not surpass that of 2005. In the ratios and data that I calculated and reviewed, the results returned mixed results at best. What is clear, is that the company is not making efficient or effective use of the assets. This may be indicate that company may face some difficulty when looking to secure financing in the event that a loan is needed.
Leverage Rates and Liquidity
The leverage ratios are the methods to determine if SciTronics has the financial leverage it needs to get the best terms in the event that outside financing is required. If a company is viewed as reasonably profitable it will find financing at terms that allow the company to leverage assets and most likely, expect a gain, and a return on equity. However, there is some risk involved if a company overextends itself, and the company may find itself in financial distress if used to excess. So it is prudent to make an effort to calculate leverage.
The total assets ratio has improved to 2.1 in 2008, this is up from 1.5 in 2005. This indicates...