Chem-Med Company Essay

Problem Statement Chem-Med conjunction is positioned strongly in its industry to achieve laid-back growth and gather in large profits in the future, but it is in need of support. To impregnable this financing, Chem-Med must address concerns of potential financers and investors regarding liquidity, efficiency, cash fall down, and the need for funding disdain apparent growth. In summation, Chem-Meds primary competitor, Pharmacia, is out-competing the guild and stealing invaluable market piece of land and sales record with lower prices.Analysis To understand Chem-Meds chores, we must first look at the companys liquidity and efficiency through the calculation of various ratios. Common measures of liquidity, activity, and favourableness for ChemMed and its competitor Pharmacia can be found in the following tabularize Chem-Med Pharmacia 2.9 2.8 1.08 5.8 30.15% 7.00% 13.67% 55.00% 29.66% 29.56% 0.8493 1.9Current Ratio Inventory Turnover Net Profit valuation account Debt-to-A ssets happen on Equity Total Asset TurnoverChem-Med is belligerent with Pharmacia in terms of Current Ratio and Return on Equity. more thanover Chem-Med turns over descent such(prenominal) slower than Pharmacia, at 1.08 multiplication per category versus Pharmacias 5.8 times. Chem-Med also utilizes assets more poorly, generating sales equal to barely .8493 times entireness assets compared to Pharmacias 1.9 times.It is interesting to billet that Chem-Med has a much higher(prenominal) profit margin than Pharmacia while maintaining virtually the same Return on Equity. To understand this phenomenon, we must deconstruct each trustys Return on Equity (ROE) using the DuPont Method. ROE Chem-Med Pharmacia We can see that Pharmacia makes up for its lower profit margin with a much higher total asset turnover as well as a collapse use of debt to achieve a return on equity alike(p) to that of Chem-Med. While ChemMed operates with a much higher profit margin than Pharmacia, its use of assets and debt falls far below the standards of its competitor, causing the unassailable conundrums. Chem-Med has a three- grade conception for the future. This business plan comes complete with financial projections that the bank has used to go steady whether or not Chem-Med 2008 2009 2010 is a safe add risk. The bank has concord to make a loan to the unwaveringly on the condition that it upholds several(prenominal) loan covenants,Current Ratio ( 2.25) 2.72 2.39 1.98 Debt/Assets ( 30%) 13.51% 14.03% 13.87% expressed in the plank at left.The problem statistic (a period ratio of 1.98 in 2010) is highlighted. This figure is below the mandated current ratio of 2.25. Chem-Med must address this projected liquidity problem to secure the necessary financing to implement its business plan. In addition to liquidity and efficiency problems, Chem-Med must address cash flow concerns. A pro-forma cash flow statement for the age 2008-2010 follows Chem-Meds cash flow statement pro vides encouraging data for potential investors. The wet expects to have tyrannical direct cash flows over the $ 167 next three years and thusly requires little outside financing to finance the commit outflows which provide fix the firms growth.Chem-Med is very $ (66) profitable Projected Net Income (2008-2010) $ one hundred one and is 2008 2009 2010 Total effectively converting those profits into operating cash flows. In fact, $ 1,150 $ 1,274 $ 1,943 $ 4,367 the firms operating cash inflows exceed the projected profits for the Chem-Med follow Statement of Cash Flows Opening Cash Balance (1/1/08) operating(a) Cash Flows $ 6,050 Investing Cash Flows $ (6,205) Financing Cash Flows $ 89 apogee Cash Balance (12/31/10)firm over the three year period. Chem-Med is effectively converting its profits into operating cash inflows and by doing so the firm has almostenough operating cash to finance its investing outflows. on that point is only a very slight cash flow problem as investing outflows still outstrip operating inflows, but only by a slim margin. The firm also faces a problem in terms of efficiency in cumulateion of debts. The collection periods for the firm for the years 2007 2010 are presented here. 2007 2008 2009 2010 As is evident, the firms ability to collect on Collection Period (Days) 53.24 61.15 72 80.87 its debts is actually decreasing in the future. Instead of increasing efficiency, the firm is decreasing in efficiency. Projected ontogeny In Net Income (2008-2010) 2008 2009 2010 10.8% 52.5% 49.4%Despite liquidity and efficiency problems, Chem-Med has a levelheaded cash flow and anticipates high growth. The projected year-to-year growth rates in net income for 2008-2010 are displayed in the adjacent table. As can be seen, the firm expects robust growth over the next three years and is therefore an attractive opportunity for investors.It appears, then, that the problems of liquidity and efficiency do comprise and should be addressed. Chem-Med has a healthy cash flow and is only slenderly deficient in operating cash flow, but because the firm is experiencing such robust growth, it is not entirely surprising that the firm has a high need for investing cash. Recommendations Chem-Meds most pressing problems involve its competitor, Pharmacia. Pharmacia is good-natured in price wars with Chem-Med, taking a 59% market allocate to Chem-Meds 25% share. Chem-Med should lower its prices in response to Pharmacias tactics to gain market share. Pharmacia is already operating at a much lower profit margin, so it is unlikely that the firm can prove prices as steeply as Chem-Med. Chem-Med can still maintain a healthy profit margin while gaining valuable market share and sales volume. change magnitude sales volume through price cuts will adjoin the firms gross sales while having no affect on total assets. This, in turn, will improve the companys total asset turnover and bring it more in-line with Pharmacias. Increasing sales volu me, however, will not necessarily improve the firms inventory turnover rate as both sales and inventory will increase to accommodate the increased volume.To improve upon this, Chem-Med should consider investing in an inventory control system or consider bran-new methods of ordering (such as just-in-time ordering) to improveits control of inventory. In addition, Chem-Med should take note that its Debt-to-Assets ratio is well below Pharmacias. Engaging in more debt financing will increase the firms financial leverage and puff out the healthy returns it expects to see in the next three years. This increased debt physical exertion will also magnify the firms return-on-equity, making it an rase more attractive firm for potential investors. Chem-Med should consider offering neglect terms to its customers for prompt feement. Such terms will encourage customers of Chem-Med to pay sooner and therefore reduce Chem-Meds collection period. This, in term, frees up cash flow for the firm an d will increase its overall operating efficiency and can help to alleviate some liquidity problems. hive away in a timely manner will also lessening the likelihood of default on accounts receivable as the accounts remain peachy for shorter periods of time. To further alleviate liquidity problems, specifically that posed by the firms current ratio in 2010, Chem-Med should consider using more long-term debt. The firm could take out a long-term loan to settle its accounts payable. This would decrease Chem-Meds current liabilities, which in turn would increase the firms current ratio. This would make the firm appear as a lower risk to bankers and investors as its ability to meet its current obligations will have improved. By lowering its prices to increase sales volume and market share, offering discounts to decrease collection periods, and refinancing its short-term debt with long-term debt, Chem-Med order can improve its marketability to investors, gain a competitive advantage in i ts industry, and look forward to improved long-term performance as a more efficient and robust firm.