Assessing a Company’s Future Financial Health Essay

1685 Words Oct 26th, 2013 7 Pages
Joe Tagliaboschi
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 sustainable. This evaluation will answer the following
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Activity Ratios 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