Chem-Med Company Essay

Problem tale Chem-Med caller-out is positioned strongly in its attention to obtain mellow harvest-tide and actualize large ingests in the future, that it is in hire of support. To secure this financing, Chem-Med essentialiness savoir-faire concerns of effectiveness financers and investors regarding liquidness, efficiency, funds blend, and the need for funding despite app atomic number 18nt ontogeny. In rise to power, Chem-Meds primary competitor, Pharmacia, is out-competing the company and thievery valuable grocery share and rough r compensateue volume with lower prices.Analysis To run across Chem-Meds difficultys, we must first come across at the companys fluidness and efficiency through the calculation of unhomogeneous balances. Common measures of fluidness, activity, and serviceability for ChemMed and its competitor Pharmacia outhouse be found in the interest table 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 caudex Turnoer Net Profit margin Debt-to-Assets descend on Equity arrive Asset TurnoverChem-Med is competitive with Pharmacia in call of Current Ratio and Re acidify on Equity. But Chem-Med turns over stock-taking more slower than Pharmacia, at 1.08 propagation per year versus Pharmacias 5.8 multiplication. Chem-Med also utilizes additions more than poorly, generating gross revenue equal to except .8493 times integrality assets compared to Pharmacias 1.9 times.It is interesting to shade that Chem-Med has a a good deal higher profit margin than Pharmacia while maintaining virtually the analogous Return on Equity. To understand this phenomenon, we must deconstruct each fast(a)s Return on Equity (ROE) utilise the DuPont Method. ROE Chem-Med Pharmacia We house bring down that Pharmacia makes up for its lower profit margin with a much higher total asset turnover as well as a better use of debt to achieve a return on beauteousness similar to that of C hem-Med. While ChemMed operates with a much higher profit margin than Pharmacia, its exercise of assets and debt falls far below the standards of its competitor, make the loaded problems. Chem-Med has a iii-year plan for the future. This occupation plan comes complete with fiscal projections that the situate has used to determine whether or non Chem-Med 2008 2009 2010 is a safe bring risk. The blaspheme has agreed to make a loan to the whole on the condition that it upholds some(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 table at left.The problem statistic (a live 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 liquidness problem to secure the necessary financing to implement its business plan. In addition to liquidity and efficiency problems, Chem-Med must address immediate payment flow concerns. A pro-forma silver flow statement for the days 2008-2010 follows Chem-Meds hard cash flow statement provides supporting data for potential investors. The tight expects to permit positive run cash flows over the $ 167 next three historic period and thus requires little outside financing to finance the expend outflows which bequeath sustain the secures growth.Chem-Med is very $ (66) profitable project Net Income (2008-2010) $ 101 and is 2008 2009 2010 Total in effect converting those profits into direct cash flows. In fact, $ 1,150 $ 1,274 $ 1,943 $ 4,367 the trues operating cash inflows exceed the projected profits for the Chem-Med Company Statement of money Flows Opening nones ratio (1/1/08) Operating capital Flows $ 6,050 Investing Cash Flows $ (6,205) Financing Cash Flows $ 89 Closing 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 al some eno ugh operating cash to finance its investing outflows.There is only a very slight cash flow problem as investing outflows quiet outstrip operating inflows, only only by a slim down margin. The firm also faces a problem in terms of efficiency in collection 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 accruement Period (Days) 53.24 61.15 72 80.87 its debts is actually lessening in the future. Instead of increasing efficiency, the firm is decreasing in efficiency. Projected harvest-festival In Net Income (2008-2010) 2008 2009 2010 10.8% 52.5% 49.4%Despite liquidity and efficiency problems, Chem-Med has a healthy 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 thusly an attractive opportunity for i nvestors.It appears, then, that the problems of liquidity and efficiency do exist and should be addressed. Chem-Med has a healthy cash flow and is only slightly 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 engaging in price wars with Chem-Med, taking a 59% market share 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 unbelievable that the firm can cut prices as steeply as Chem-Med. Chem-Med can still maintain a healthy profit margin while gaining valuable market share and sales volume. Increasing sales volume through price cuts pull up stakes change magnitude the firms gross sales while having no shanghai on total assets. This, in turn, entrust better the companys total asset turnover and bring it more in-line with Pharmacias. Increasing sales volume, however, allow for not necessarily improve the firms memorial turnover rate as both sales and inventory leave behind increase to accommodate the change magnitude volume.To improve upon this, Chem-Med should allot investing in an inventory control system or consider new methods of ordering (such as just-in-time ordering) to improve its control of inventory. In addition, Chem-Med should take observe that its Debt-to-Assets ratio is well below Pharmacias. gentle in more debt financing will increase the firms financial leverage and pad the healthy returns it expects to see in the next three years. This increased debt usage will also magnify the firms return-on-equity, making it an even more attractive firm for potential investors. Chem-Med should consider fling discount terms to its customers for prompt payment. 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 and will increase its overall operating efficiency and can help to conciliate some liquidity problems.Collecting in a timely manner will also decrease the likelihood of inadvertence on accounts receivable as the accounts bide outstanding 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 semipermanent 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 refina ncing its short-term debt with long-term debt, Chem-Med Company can improve its marketability to investors, gain a competitive advantage in its industry, and look forward to improved long-term performance as a more efficient and robust firm.