Case 2 Case 2 Case 2 Chem Med Company Copyright 2017 McGraw

Case 2case 2case2chem Med Companycopyright 2017 Mcgraw Hill Educatio

Case 2case 2case2chem Med Companycopyright 2017 Mcgraw Hill Educatio

Analyze Chem-Med Company’s financial performance, growth prospects, risk profile, and industry comparison based on provided financial statements and industry data. Address the following questions:

1. Determine Chem-Med’s sales growth rate in 2015 and forecast for 2016-2018.

2. Determine Chem-Med’s net income growth in 2015 and forecast for 2016-2018, and compare the growth rates of net income and sales. Assess if the 2016 income statement data warrants any adjustments.

3. Compare Chem-Med’s current ratio for 2015 with Pharmacia’s and the industry average; calculate Chem-Med’s current ratio for 2018 and evaluate for any issues.

4. Calculate Chem-Med’s total debt-to-assets ratio for 2015-2018, identify trends, and compare with industry averages for 2015.

5. Compute Chem-Med’s average accounts receivable collection period for 2015-2018, analyze trends, and discuss the implications.

6. Using the Du Pont method, compare Chem-Med’s return on equity (ROE) for 2015 with Pharmacia and the industry. Calculate ROE using the provided formula and analyze the sources of ROE for Chem-Med and Pharmacia.

Sample Paper For Above instruction

Analyzing the financial performance and potential investment viability of Chem-Med Company requires careful examination of its financial statements, industry context, and comparative ratios. This essay provides an in-depth assessment structured around the specified questions, offering insights into the company's growth, profitability, risk, and industry standing.

1. Sales Growth Rate Analysis (2015-2018)

In 2015, Chem-Med's sales reached approximately $3,814,000. Forecasts for subsequent years indicate a significant upward trajectory: $5,340,000 in 2016, $7,475,000 in 2017, and an estimated $10,466,000 in 2018. To determine the growth rate in 2015, we consider the previous year's sales; however, as the 2015 figure is the first in the data set, growth calculations focus on the year-to-year increases:

  • 2015 to 2016: ((5,340 - 3,814) / 3,814) * 100 ≈ 39.9%
  • 2016 to 2017: ((7,475 - 5,340) / 5,340) * 100 ≈ 40.2%
  • 2017 to 2018: ((10,466 - 7,475) / 7,475) * 100 ≈ 40.0%

These consistent high growth rates suggest robust expansion in Chem-Med’s sales, likely driven by increased market penetration, product development, and competitive positioning.

2. Net Income Growth and Comparison with Sales

Chem-Med’s net income in 2015 was estimated at approximately $1,150,000, with projections of $1,609,000 in 2016, $1,943,000 in 2017, and $2,903,000 in 2018. Growth rates are calculated as:

  • 2015 to 2016: ((1,609 - 1,150) / 1,150) * 100 ≈ 39.7%
  • 2016 to 2017: ((1,943 - 1,609) / 1,609) * 100 ≈ 20.9%
  • 2017 to 2018: ((2,903 - 1,943) / 1,943) * 100 ≈ 49.3%

Notably, the growth in net income generally mirrors or surpasses sales growth, especially in 2018, indicating improving profit margins. In 2016, a deep dive into the income statement suggests a significant increase in operating expenses or interest, which might warrant revisiting assumptions or adjusting forecasts for more accuracy.

3. Liquidity Position: Current Ratio Comparison and Forecast

For 2015, Chem-Med’s current assets were approximately $261,000, and current liabilities about $647,000, giving a current ratio of 0.40, which is substantially below the industry average of 2.2 or Pharmacia’s range of 2.8 to 4. Notably, this indicates potential liquidity issues. Projecting into 2018, with current assets increasing to approximately $422,000 and current liabilities estimated at $1,512,000, the current ratio becomes:

(422 / 1,512) ≈ 0.28

This further decline signals heightened liquidity concerns, possibly limiting the company's ability to meet short-term obligations without securing additional financing or restructuring operations. Immediate attention to working capital management would be critical.

4. Debt-to-Assets Ratio Trends and Industry Comparison

Calculations show Chem-Med’s debt-to-assets ratio for 2015 as:

(664 / 4,491) ≈ 0.148 or 14.8%

Similarly, for 2018, with estimated total liabilities of approximately $1,995,000 and total assets of about $11,995,000, the ratio is:

(1,995 / 11,995) ≈ 0.166 or 16.6%

The trend indicates a gradual increase in leverage, but overall debt remains well below the industry maximum of 30%. Compared to the industry median, which varies up to 52%, Chem-Med’s leverage appears conservative, providing a cushion against financial distress.

5. Accounts Receivable Collection Period

Using the average accounts receivable from the balance sheet and sales figures, the collection period in 2015 approximates to:

(AR / Sales) 365 days ≈ (1,351 / 3,814,000) 365 ≈ negligible in days due to scale, but assuming AR is $1,351,000 and sales are in dollars, the collection period is roughly 129 days. As sales increase annually, unless receivables are managed efficiently, the collection period could extend, impacting cash flows.

A shorter collection period enhances liquidity and reduces credit risk; thus, ongoing monitoring and credit policies should be prioritized.

6. Return-on-Equity (ROE) and Du Pont Analysis

Chem-Med’s ROE for 2015, based on net income and equity, is approximately:

(1,150,000 / 3,424,000) ≈ 33.6%

Using the Du Pont formula:

ROE = Profit margin * Asset turnover / (1 - Debt to assets)

Profit margin = Net income / Sales = 1,150,000 / 3,814,000 ≈ 30.2%

Asset turnover = Sales / Total assets = 3,814,000 / 4,491,000 ≈ 0.85

Debt to assets = 0.148

Thus:

ROE ≈ 0.302 0.85 / (1 - 0.148) ≈ 0.302 0.85 / 0.852 ≈ 0.30 or 30%

Compared to Pharmacia, with ROE of approximately 29.56%, Chem-Med exhibits similar or slightly higher efficiency in generating returns, largely driven by profit margins and moderate leverage.

These analyses highlight Chem-Med’s strong profitability, conservative debt levels, and opportunity for improving liquidity. However, challenges in cash management and funding remain. Continuous evaluation and strategic action can enhance its investment appeal and long-term stability.

References

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