Assignment: Medical Technology Company
Medical Technology Company (MTC) is a New Jersey-based company specializing in manufacturing electronic medical equipment. MTC's products are used in hospitals, clinics and doctors offices. The company was founded by two doctors, Jose Garcia and Steve Picou and began operations in 2005, initially selling their products to local clinics and hospitals, then expanding to the broader U.S. market.
They have expanded significantly in recent years and now sell a small portion of annual sales to companies in Canada, Mexico, and Europe. Due to the high level of demand for their products, they are able to price all of their sales in US Dollars and sales have been growing rapidly (about 25% per year). For the last three years (2014-2016) their profits have been exceptionally strong, but there always seems to be a shortage of cash for their operations.
Even though Jose and Steve have put in extra equity capital, reinvested all net profit back in the business, and used long-term borrowing as much as possible for the expansion of production facilities, they are continually having to make short-term borrowing arrangements with their bank to cover funds shortfalls, sometimes with very little notice.
Examine MTC's current financial position and see if you can determine why they are having these liquidity problems. The firm's current financial statements are provided below. Assume a tax rate of 35% and a weighted average cost of capital (WACC) of 10%.
Note: Use end of period figures for ratio calculations rather than average figures.
Specific Questions:
- Complete the table of key financial ratios on the last page using an Excel spreadsheet.
- Answer the following questions in your writeup
- Why may companies with high growth rates have liquidity problems?
- How does the fact that this company is a manufacturer affect its liquidity needs as it grows?
- What liquidity problems does this firm have and are they related to either the company's growth and capital structure?
- What would you do to solve this company's problems?
- Assume for forecasting purposes that following information for 2017:
- The asset to sales ratio will be 1.25
- The spontaneous liabilities to sales ratio will be 0.1
- The profit margin will be 5% of sales and no dividends will be paid
- Determine the AFN at sales growth of 5%, 10%, 15%, 20% and 25%
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Medical Technology Company - Income Statements
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All figures in $1,000
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2014
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2015
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2016
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Revenues
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35,435
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44,294
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55,367
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Cost of Goods Sold
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21,071
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25,690
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31,006
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Gross Profit
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14,364
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18,603
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24,362
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General Operating Expenses
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4,846
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5,594
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6,642
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Management Salaries
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2,964
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3,531
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3,833
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Insurance
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1,053
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1,214
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1,364
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Depreciation
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1,243
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1,561
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1,645
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Misc. and Other Expenses
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993
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1,138
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1,340
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Operating Profit
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3,265
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5,566
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9,538
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Interest Expense
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2,122
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3,825
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6,642
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Net Profit Before Taxes
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1,143
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1,741
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2,895
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Income Tax (35%)
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400
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609
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1,013
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Net Profit After Taxes
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743
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1,132
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1,882
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Medical Technology Company - Year-End Balance Sheet
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All figures in $1,000
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Assets
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2014
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2015
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2016
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Cash & Equivalents
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787
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524
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72
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Accounts Receivable
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3,531
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5,001
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6,983
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Inventory
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7,166
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9,579
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12,014
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Prepaid Expenses
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730
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1,053
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1,231
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Total Current Assets
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12,214
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16,157
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20,300
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Fixed Assets (net)
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21,351
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35,618
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51,845
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Total Assets
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33,565
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51,775
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72,144
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Liabilities & Equity
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Accounts Payable
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1,750
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2,029
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2,281
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Deferred Taxes & Wages
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733
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1,021
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1,325
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Notes Payable
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1,052
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2,236
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3,508
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Current Liabilities
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3,535
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5,286
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7,114
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Long-Term Debt
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13,477
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22,804
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33,463
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Total Liabilities
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17,012
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28,090
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40,577
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Common Stock
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15,000
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21,000
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27,000
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Retained Earnings
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1,553
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2,685
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4,567
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Total Equity
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16,553
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23,685
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31,567
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Total Liabilities & Equity
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33,565
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51,775
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72,144
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Medical Technology Co. - Statement of Cash Flows - 2015-2016
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All figures in $1,000
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2015
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2016
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Cash Flows from Operations
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Net Income
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1,132
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1,882
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Adjustments to Reconcile NI to Cash
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Depreciation
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1,561
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1,645
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Increase in Accounts Receivable
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(1,470)
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(1,983)
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Increase in Inventories
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(2,413)
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(2,435)
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Increase in Pre-Paid Expenses
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(323)
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(177)
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Increase in Accounts Payable
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279
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252
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Increase in Accrued Taxes/Wages
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288
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304
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Net Cash from Operating Activities
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(947)
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(511)
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Cash Flows from Investing
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Capital Expenditures (Net)
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(14,266)
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(16,227)
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Depreciation Adjustment
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(1,561)
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(1,645)
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Net Cash from Investing
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(15,827)
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(17,872)
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Cash Flows from Financing
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Increase in Notes Payable
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1,184
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1,272
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Increase in Long-Term Debt
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9,327
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10,659
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Increase in Common Stock
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6,000
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6,000
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Net Cash from Financing
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16,511
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17,931
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Net Change in Cash
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(263)
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(452)
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Medical Technology Company - Key Financial Ratios - 2014-2016
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2014
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2015
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2016
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Ind. Avg.
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Current Ratio (CA/CL)
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3.50
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Quick Ratio (Cash+AR/CL)
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1.25
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Cash Flow to Total Debt
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0.15
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Times Interest Earned (OP/Int Exp)
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1.65
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LT Debt to Capital (LTD/LTD+TE)
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45%
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Total Liabilities to Total Assets
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50%
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Return on Common Equity
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5.6%
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Return on Sales (NI/Sales)
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5.0%
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Return on Total Assets
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4.5%
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Interest/Total Debt
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12.5%
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Economic Value Added (EVA)
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+$2.0 M
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Days' Inventory
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110
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Days' Receivables
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32
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Days' Payables
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33
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Cash Conversion Cycle
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109
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Industry Averages are for similar sized companies in same industry as Medical Technology Company.
Attachment:- Attachments.rar