Medical Technology Company/Excel Exercise #2: Liquidity Management – 2017

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June 21, 2017
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Medical Technology Company/Excel Exercise #2: Liquidity Management – 2017

Medical Technology Company/Excel Exercise #2: Liquidity Management – 2017
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:
1. Complete the table of key financial ratios on the last page using an Excel spreadsheet.
2. Answer the following questions in your writeup
a. Why may companies with high growth rates have liquidity problems?
b. How does the fact that this company is a manufacturer affect its liquidity needs as it grows?
c. What liquidity problems does this firm have and are they related to either the company’s growth and capital structure?
d. What would you do to solve this company’s problems?
3. Assume for forecasting purposes that following information for 2017:
a. The asset to sales ratio will be 1.25
b. The spontaneous liabilities to sales ratio will be 0.1
c. The profit margin will be 5% of sales and no dividends will be paid
d. Determine the AFN at sales growth of 5%, 10%, 15%, 20% and 25%
Medical Technology Company – Income Statements
All figures in $1,000
2014 2015 2016
Revenues 35,435 44,294 55,367
Cost of Goods Sold 21,071 25,690 31,006
Gross Profit 14,364 18,603 24,362
General Operating Expenses 4,846 5,594 6,642
Management Salaries 2,964 3,531 3,833
Insurance 1,053 1,214 1,364
Depreciation 1,243 1,561 1,645
Misc. and Other Expenses 993 1,138 1,340
Operating Profit 3,265 5,566 9,538
Interest Expense 2,122 3,825 6,642
Net Profit Before Taxes 1,143 1,741 2,895
Income Tax (35%) 400 609 1,013
Net Profit After Taxes 743 1,132 1,882
Medical Technology Company – Year-End Balance Sheet
All figures in $1,000
Assets 2014 2015 2016
Cash & Equivalents 787 524 72
Accounts Receivable 3,531 5,001 6,983
Inventory 7,166 9,579 12,014
Prepaid Expenses 730 1,053 1,231
Total Current Assets 12,214 16,157 20,300
Fixed Assets (net) 21,351 35,618 51,845
Total Assets 33,565 51,775 72,144
Liabilities & Equity
Accounts Payable 1,750 2,029 2,281
Deferred Taxes & Wages 733 1,021 1,325
Notes Payable 1,052 2,236 3,508
Current Liabilities 3,535 5,286 7,114
Long-Term Debt 13,477 22,804 33,463
Total Liabilities 17,012 28,090 40,577
Common Stock 15,000 21,000 27,000
Retained Earnings 1,553 2,685 4,567
Total Equity 16,553 23,685 31,567
Total Liabilities & Equity 33,565 51,775 72,144
Medical Technology Co. – Statement of Cash Flows – 2015-2016
All figures in $1,000
2015 2016
Cash Flows from Operations
Net Income 1,132 1,882
Adjustments to Reconcile NI to Cash
Depreciation 1,561 1,645
Increase in Accounts Receivable (1,470) (1,983)
Increase in Inventories (2,413) (2,435)
Increase in Pre-Paid Expenses (323) (177)
Increase in Accounts Payable 279 252
Increase in Accrued Taxes/Wages 288 304
Net Cash from Operating Activities (947) (511)
Cash Flows from Investing
Capital Expenditures (Net) (14,266) (16,227)
Depreciation Adjustment (1,561) (1,645)
Net Cash from Investing (15,827) (17,872)
Cash Flows from Financing
Increase in Notes Payable 1,184 1,272
Increase in Long-Term Debt 9,327 10,659
Increase in Common Stock 6,000 6,000
Net Cash from Financing 16,511 17,931
Net Change in Cash (263) (452)
Medical Technology Company – Key Financial Ratios – 2014-2016
2014 2015 2016 Ind. Avg.
Current Ratio (CA/CL) 3.50
Quick Ratio (Cash+AR/CL) 1.25
Cash Flow to Total Debt 0.15
Times Interest Earned (OP/Int Exp) 1.65
LT Debt to Capital (LTD/LTD+TE) 45%
Total Liabilities to Total Assets 50%
Return on Common Equity 5.6%
Return on Sales (NI/Sales) 5.0%
Return on Total Assets 4.5%
Interest/Total Debt 12.5%
Economic Value Added (EVA) +$2.0 M
Days’ Inventory 110
Days’ Receivables 32
Days’ Payables 33
Cash Conversion Cycle 109
Industry Averages are for similar sized companies in same industry as Medical Technology Company.
Analysis of Financial Statements – Practice Case
Rev. Oct 2016 – AFP Workshop
©2016 – The Treasury Academy, Inc. – All Rights Reserved 1
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 2004, 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 (2013-2015) 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, calculation of
key ratios and industry averages are provided on the following pages. Assume a tax rate
of 35% and a weighted average cost of capital (WACC) of 10%.
Specific Questions:
1. Analyze the financial statements and ratios and assess the company’s financial
situation and viability as potential lending opportunity (banker’s view) or equity
investment (portfolio manager’s view).
2. Why may companies with high growth rates have liquidity problems?
3. How does the fact that this company is a manufacturer affect its liquidity needs as
it grows?
4. Are revenues, profits and cash flows all basically the same thing?
5. What liquidity problems does this firm have?
6. Are the liquidity problems related to the company’s growth and capital structure?
7. What would you do to solve this company’s problems?
8. Forecasting Question: Assuming a net profit margin of 4.0%, a total asset to sales
ratio of 125% and a spontaneous liability to sales ratio of 6.5%, what would the
need for additional funding be at sales increase levels of 10%, 15%, and 25%?
Analysis of Financial Statements – Practice Case
Rev. Oct 2016 – AFP Workshop
©2016 – The Treasury Academy, Inc. – All Rights Reserved 2
Medical Technology Company – Income Statements
All figures in $1,000
2013 2014 2015
Revenues 35,435 44,294 55,367
Cost of Goods Sold 21,071 25,690 31,006
Gross Profit 14,364 18,603 24,362
General Operating Expenses 4,846 5,594 6,642
Management Salaries 2,964 3,531 3,833
Insurance 1,053 1,214 1,364
Depreciation 1,243 1,561 1,645
Misc. and Other Expenses 993 1,138 1,340
Operating Profit 3,265 5,566 9,538
Interest Expense 2,122 3,825 6,642
Net Profit Before Taxes 1,143 1,741 2,895
Income Tax (35%) 400 609 1,013
Net Profit After Taxes 743 1,132 1,882
Analysis of Financial Statements – Practice Case
Rev. Oct 2016 – AFP Workshop
©2016 – The Treasury Academy, Inc. – All Rights Reserved 3
Medical Technology Company – Year-End Balance Sheet
All figures in $1,000
Assets 2013 2014 2015
Cash & Equivalents 787 524 72
Accounts Receivable 3,531 5,001 6,983
Inventory 7,166 9,579 12,014
Prepaid Expenses 730 1,053 1,231
Total Current Assets 12,214 16,157 20,300
Fixed Assets (net) 21,351 35,618 51,845
Total Assets 33,565 51,775 72,144
Liabilities & Equity
Accounts Payable 1,750 2,029 2,281
Deferred Taxes & Wages 733 1,021 1,325
Notes Payable 1,052 2,236 3,508
Current Liabilities 3,535 5,286 7,114
Long-Term Debt 13,477 22,804 33,463
Total Liabilities 17,012 28,090 40,577
Common Stock 15,000 21,000 27,000
Retained Earnings 1,553 2,685 4,567
Total Equity 16,553 23,685 31,567
Total Liabilities & Equity 33,565 51,775 72,144
Analysis of Financial Statements – Practice Case
Rev. Oct 2016 – AFP Workshop
©2016 – The Treasury Academy, Inc. – All Rights Reserved 4
Medical Technology Co. – Statement of Cash Flows – 2014-2015
All figures in $1,000
2014 2015
Cash Flows from Operations
Net Income 1,132 1,882
Adjustments to Reconcile NI to Cash
Depreciation 1,561 1,645
Increase in Accounts Receivable (1,470) (1,983)
Increase in Inventories (2,413) (2,435)
Increase in Pre-Paid Expenses (323) (177)
Increase in Accounts Payable 279 252
Increase in Accrued Taxes/Wages 288 304
Net Cash from Operating Activities (947) (511)
Cash Flows from Investing
Capital Expenditures (Net) (14,266) (16,227)
Depreciation Adjustment (1,561) (1,645)
Net Cash from Investing (15,827) (17,872)
Cash Flows from Financing
Increase in Notes Payable 1,184 1,272
Increase in Long-Term Debt 9,327 10,659
Increase in Common Stock 6,000 6,000
Net Cash from Financing 16,511 17,931
Net Change in Cash (263) (452)
Analysis of Financial Statements – Practice Case
Rev. Oct 2016 – AFP Workshop
©2016 – The Treasury Academy, Inc. – All Rights Reserved 5
Medical Technology Company – Key Financial Ratios – 2013-2015
2013 2014 2015 Ind. Avg.
Current Ratio (CA/CL) 3.46 3.06 2.85 3.50
Quick Ratio (Cash+AR/CL) 1.22 1.05 0.99 1.25
Cash Flow to Total Debt 0.14 0.11 0.10 0.15
Times Interest Earned (OP/Int Exp) 1.54 1.46 1.44 1.65
LT Debt to Capital (LTD/LTD+TE) 44.9% 49.1% 51.5% 45%
Total Liabilities to Total Assets 50.7% 54.3% 56.2% 50%
Return on Sales (NI/Sales) 2.1% 2.6% 3.4% 5.0%
Total Asset Turnover (Sales/TA) 1.06 0.86 0.77 0.90
Return on Total Assets 2.2% 2.2% 2.6% 4.5%
Equity Multiplier (TA/Eq) 2.03 2.19 2.29 1.25
Interest/Total Debt 14.6% 15.3% 18.0% 12.5%
Return on Common Equity 4.5% 4.8% 6.0% 5.6%
Economic Value Added (EVA) -$880,750 -$1,031,000 -$303,300 +$2.0 M
Days’ Inventory 124 136 141 110
Days’ Receivables 36 41 46 32
Days’ Payables 30 29 27 33
Cash Conversion Cycle 130 148 161 109
Industry Averages are for similar sized companies in same industry as Medical
Technology Company.
Medical Technology Company – Year-End Balance Sheet
2014 2015 2016
Revenues $35,435.00 $44,294.00 $55,367.00
Cost of Goods Sold $21,071.00 $25,690.00 $31,006.00
Gross Profit $14,364.00 $18,603.00 $24,362.00
General Operating Expenses $4,846.00 $5,594.00 $6,642.00
Management Salaries $2,964.00 $3,531.00 $3,833.00
Insurance $1,053.00 $1,214.00 $1,364.00
Depreciation $1,243.00 $1,561.00 $1,645.00
Misc. and Other Expenses $993.00 $1,138.00 $1,340.00
Operating Profit $3,265.00 $5,566.00 $9,538.00
Interest Expense $2,122.00 $3,825.00 $6,642.00
Net Profit Before Taxes $1,143.00 $1,741.00 $2,895.00
Income Tax (35%) $400.00 $609.00 $1,013.00
Net Profit After Taxes $743.00 $1,132.00 $1,882.00

 

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