Assessing a companys future financial health

Document Type:Thesis

Subject Area:Engineering

Document 1

Moreover, the analysis can also be done by independent assessment companies. The key aspect while assessing the financial health of a particular company can be based on the following basic concepts; cash flow, leverage, profitability, and liquidity. However, the above aspects are considered after analyzing the financial ratios of the particular company. It is important to calculate the score of these key concepts after analyzing the financial ratios. Financial heath is a basic term used to refer to the financial situation of a company. A reducing trend in the ratio indicates a worsen liquidity positon of the company concerned. In addition to the liquidity ratios, assessing the profitability of SciTronics, also formed the basis of assessment of the company’s performance.

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It is important to use the core profitability ratios in order to assess the profitability of the company. First, return on equity is high in the year 2008 as compared to the year 2005. This is a clear reflection of effective utilization of investors’ funds. Total asset turnover ratio is worsened in year 2008 as compared to year 2005. This indicates that the company is not using is assets as effectively as it should. Also, fixed asset turnover ratio worsened in year 2008 in contrast to year 2005. This is a clear reflection that the company is not effective in terms of using its fixed assets in order to generate sales. This assertion is based on the fact that high fixed asset turnover ratios indicate effective utilization of the assets towards generating sales.

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Also, times interest earned ratio also improved in 2008 as compared to 2005. A ratio of 13 for instance means that the firm will make more income to pay for its total interest 13 times over. Moreover, account payable as perfect cost of goods sold declined in the year 2008 in contrast to 2005. For this reason, the company did not depend much on its suppliers for funds in the year 2008 as compared to the year 2005. To sum up, profitability ratio was also essential in determining the financial leverage of the company. If a company has more equity than debt the company is regarded to as stable, hence can fully carry out its operation. In the case of SciTronics 30% of company is funded by creditors while 70 % is financed by the owners, the total debt ratio automatically shows that the company is healthy.

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The other essential aspect used to ascertain the financial strength of a firm is net profit as a result of sales. SciTronics net profit as a percentage of sale for the year 2008 is 5. This is an increase as compared to the year 2005, which was 3. This needs to looked into as their might be a problem with either the current or fixed asset or the firm might be taking too long to get their debts back. Lastly, the question of how the firm maintained a debt-equity mix of 30. 70 in their investment portfolio is also an important question in respect to the questions concerning the company’s strength Profitability In the year 2008, SciTronics percentage profit made from sales was 5. This percentage represent an increase compared to the year 2005, which was 3.

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Also, in regard to comparison of the increase in profit as from 2005 to 2008, the percentage profit is 68. 7% Year 2005: EBIT=10000× (1-0. 55= 5500 Average Tax Rate (4000÷9000) ×100=44% EBIAT = (5500 ÷ (10,000+ 61,000) ×100 = (5000 ÷ 71,000) × 100 = 7. 7% In the year 2008, SciTronics had earned $14,000 and had $75,000 of owners’ equity. Moreover, the returns on equity was 18. 67%, this value represented an increment from the 8. 58 Turnover in days = 365 ÷1. 01 days In the year 2008, SciTronics had an average sale per day of $668. 5 and the average collection period was 98. 7 days, further, $ 66,000 had been invested in account receivables at the end of the year. The average collections increased from an average collection of 104. 13 days Inventory Turnover Ratio 2005 Inventory = 43,000 ÷ 21,000 = 2. 04 Turnover in days = 365 ÷ 2. 92 days In 2008 Scitronics made a sale of $244,000 at the same period having a net fixed assets of $26,000, further, the turnover ratio deteriorated from 13.

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36 times in 2005 to 9. 38 times in 2008. At the end of 2008 SciTronics owed its suppliers $61,000 which was 8% 0f cost of goods sold and it was a decline from 11. 6% received in 2005. The company is more likely and able to pay its suppliers in 2008 than it could have in 2005. Illustrations Cost of goods sold (2008) (6000 ÷ 74000) × 100% = 8% Cost of goods sold (2005) 5000 ÷ 43,000) × 100% = 11. 6% Liquidity of SciTronics SciTronic Company had a debt of $48,000 due to be paid with a period of one year at the same time, the company had current assets adding up to $ 133,000. 90 Profitability SciTronics return on equity increased from 8. 2% in 2005 to 18. 7% in 2008. Net income / sales = 1400 ÷ 244,000 = 0. 05 Sales/ Total assets = 244,000 ÷ 159,000 = 1. Retrieved from https://www. researchgate. net/publication/268257431_Economic_and_financial_analysis_of_a_company_-_support_for_users_of_information.

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