Chem Med Case

974 Words Mar 4th, 2014 4 Pages
Chem Med Case 1

Chem-Med Company
1. What was Chem-Med 's rate of sales growth in 2003? What is it forecasted to be in 2004, 2005, and 2006?
Sales Growth
= (Sales this year - Sales last year)/Sales last year for 2003: ($ 3,814 - $3,051) / $3,051 = + 25% for 2004: ($ 5,340 - $3,814) / $3,814 = + 40% for 2005: ($ 7,475 - $5,340) / $5,340 = + 40% for 2006: ($ 10,466 - $7,475) / $7,475 = + 40%
2. What is the company 's rate of net income growth in 2004,2005, and 2006? Is projected net income growing faster or slower than projected sales? After computing these values, take a hard look at the 2004 income statement data to see if you want to make any adjustments.
Net income growth
= (Net income this year - Net income last year) / Net
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The consequences of increasing credit period are more cash required to be invested in working capital and also losses due to increased bad debts.
6. How does Chem-Med 's retum -on- equity ratio (ROE) compare to Pharmacia 's and the industry for 2003? Using the Du Pont method, compare the positions of Chem-Med and Pharmacia. Compute ROE for each company using the following formula:
ROE = Profit margin x Asset turnover /(l-Debt to assets)
Compare the results to determine the sources of ROE for each company.
Chem-Med 's return on equity ratio
= Net income / Total equity for 2003
= $1,150 / $3,877
= 29.7%
Pharmacia 's ROE in 2003 was 29.56% and the industry average was only 12.29%. From the industry average view point, Chem-med is generating much better return on its equity.
Du-Pont Analysis
ROE = Profit
Margin times: Asset
Turnover divided by: (1 - Debt to Assets)
Chem-Med, 2003 .2985 .3033 * 0.85 / (1 - .137)
Pharmacia .2956 .07 * 1.9 / (1 - .55)
Note the drastic difference in the operation of the two companies, even though their ROEs are nearly the same. Chem-Med makes relatively few sales (low asset turnover), but makes a lot of money on each one (30%). Pharmacia is just the opposite - its profit margin is low, but it manages much higher sales in relation to assets. Also by using more debt than

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