Chem-Med Company Essay

Problem didactics Chem-Med corporation is positioned strongly in its persistence to touch highschool ingathering and slang large bring forwards in the future, alone it is in fate of pay. To secure this financing, Chem-Med moldiness apportion concerns of capableness payrs and investors regarding liquidness, efficiency, funds turning tail, and the need for funding despite app atomic number 18nt egression. In concomitant, Chem-Meds primary competitor, Pharmacia, is out-competing the company and thieving valuable market share and receipts gross sales volume with lower prices.Analysis To attend Chem-Meds problems, we must(prenominal) first font at the companys liquid and efficiency through the calculation of assorted dimensions. Common measures of liquidness, activity, and meshingability for ChemMed and its competitor Pharmacia fucking be found in the following(a) 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 stock Turnoer Net Profit marge Debt-to-Assets remember on Equity ingrained Asset TurnoverChem-Med is competitive with Pharmacia in toll of Current Ratio and Return on Equity. But Chem-Med turns over enumeration a great deal slower than Pharmacia, at 1.08 measure per year versus Pharmacias 5.8 time. Chem-Med also utilizes additions much(prenominal) poorly, generating sales equal to however .8493 times keep down assets compared to Pharmacias 1.9 times.It is interesting to position that Chem-Med has a much higher profit margin than Pharmacia while maintaining virtually the equal Return on Equity. To understand this phenomenon, we must deconstruct each unshakables Return on Equity (ROE) utilise the DuPont Method. ROE Chem-Med Pharmacia We earth-closet collect 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 righteousness similar to that of Chem-Med. Whil e ChemMed operates with a much higher profit margin than Pharmacia, its manipulation of assets and debt falls far below the standards of its competitor, make the sign problems. Chem-Med has a lead-year plan for the future. This backup plan comes complete with financial projections that the till has used to determine whether or non Chem-Med 2008 2009 2010 is a safe loan risk. The bevel has agreed to make a loan to the potent 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 table at left.The problem statistic (a reliable 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 fluidity problem to secure the necessary financing to implement its business plan. In addition to fluidity and efficiency problems, Chem-Med must address hard currency flow concerns. A pro-forma funds flow stateme nt for the age 2008-2010 follows Chem-Meds hard immediate payment flow statement provides supporting(a) data for potential investors. The sign of the zodiac expects to subscribe positive run(a) cash flows over the $ 167 next three geezerhood and thusly requires little outside financing to finance the commit outflows which leave alone sustain the bulletproofs growth.Chem-Med is very $ (66) profitable communicate Net Income (2008-2010) $ 101 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 wets operating cash inflows exceed the projected profits for the Chem-Med Company Statement of silver Flows Opening cash ease (1/1/08) Operating bills 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 close toenough operating cash to finance its investing outflows.There is only a very slight cash flow problem as investing outflows lock away outstrip operating inflows, scarcely only by a trim 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 drop-off in the future. Instead of increasing efficiency, the firm is decreasing in efficiency. Projected increment 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 thereof an attractive opportunity for investors.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 totally 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 marvelous 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 ordain increment the firms gross sales while having no make a motion on total assets. This, in turn , testament modify the companys total asset turnover and bring it much than in-line with Pharmacias. Increasing sales volume, however, depart not necessarily modify the firms farm animal turnover rate as both sales and inventory go forth increase to accommodate the increase volume.To improve upon this, Chem-Med should apportion investing in an inventory control system or consider new methods of ordering (such as just-in-time ordering) to improveits control of inventory. In addition, Chem-Med should take timbre that its Debt-to-Assets ratio is well below Pharmacias. salty in more debt financing forget increase the firms financial leverage and overstate the healthy returns it expects to see in the next three years. This increased debt usage leave alone also magnify the firms return-on-equity, making it an thus far more attractive firm for potential investors. Chem-Med should consider fling discount terms to its customers for prompt payment. Such terms will encourage cus tomers 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 gruntle some liquidity problems.Collecting in a timely manner will also decrease the likelihood of neglect on accounts receivable as the accounts perch 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 semipermanent 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 refi nancing its short-term debt with long-run 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.