...INTERNATIONAL JOURNAL OF MANAGEMENT, BUSINESS, AND ADMINISTRATION VOLUME 8, NUMBER 1, 2005 Assessing A Firm’s Future Financial Health Alicia Kritsonis MBA Graduate Student California State University, Dominquez Hills ABSTRACT The purpose of this article is to explain a step-by-step process that can assess whether a firm will remain in balance over the next two to three years. Various financial ratios will be discussed as a critical aspect of this process analysis. A case study of assessing the future health of the Harley Davidson, Inc. using a ratio analysis is included in the article to explain the step-by-step process used by managers to ensure a firm’s success. A great analogy comes to mind when considering the effects of assessing your firm’s future health. It is helpful to think of your firm as a three-legged stool. The legs are operations, marketing, and finance/accounting. As you, the leader, try to sit atop the stool, it must be balanced so that you can shift your position and sit comfortably. However, if one of the legs of the stool is too short or too long, then the stool is difficult to manage and unstable (http://www.thefullermangroup.com). Here is an example of an unbalanced firm. A firm borrows cash in order to expand its facility and operating capacity. However, sales remain constant resulting in a cash shortage. Consequently, the increased overhead costs diminish the working capital. Purchase discounts are missed resulting in decreased margins. The...
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...Assessing a Company’s Future Financial Health 911 - 412 3 Steps 1, 2 : Analyze Fundamentals The corporate financial system is driven by a firm’s goals, business unit choices and strategies, market conditions , a n d operating characteristics. The firm’s strategy and sales growth in each of its business units will determine the investment in assets needed to support these strategies; and the effectiveness of the strategies, combined with the response of competitors and regulators, will strongly influence the firm’s competitive and profit performance, its need for external finance, and access to debt and equity markets. Clearly, many of these questions require information beyond that contained in a compan y’s published financial reports. Step 3: Analyze Investments to Support the Business Unit(s) Strategy(ies) The business unit strategies inevitably require investments in accounts receivable, inventories, plant & equipment, and possibly, acquisitions. Step 3 of the proces s is an attempt to estimate the amount that will be tied up in each of the asset types by virtue of sales growth and the improvement/de terioration in asset management. An analyst can make a rough estimate by studying the past pattern of the collection period, the days of inventory, and plant & equipment as a percent age of cost of goods sold; and then applying a “reasonable value” for each category to the sales forecast or the forecast of cost of goods sold. E ...
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...9 -9 1 1 -4 1 2 REV: MAY 28, 2012 Assessing a Company’s Future Financial Health Assessing the long-term financial health of a company is an important task for management as it formulates goals and strategies and for outsiders as they consider the extension of credit, long-term supplier agreements, or an investment in a company’s equity. History abounds with examples of companies that embarked on overly ambitious programs and subsequently discovered that their portfolios of programs could not be financed on acceptable terms. The outcome was frequently the abandonment of programs mid-stream at considerable financial, organizational, and human cost. It is the responsibility of management to anticipate a future imbalance in the corporate financial system before its severity is reflected in the financials, and to consider corrective action before both time and money are exhausted. The avoidance of bankruptcy is an insufficient standard. Management must ensure the continuity of the flow of funds to all of its strategically important programs, even in periods of adversity. Figure A provides a conceptualization of the corporate financial system, with a suggested step-bystep process to assess whether it will remain in balance over the ensuing 3 to 5 years. The remainder of this note discusses each of the steps in the process and then provides an exercise on the various financial measures that are useful as part of the analysis. The final section of the note demonstrates ...
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...Professor Thomas Piper prepared the original version of this note, “Assessing a Firm’s Future Financial Health,” HBS No. 201-077, which is being replaced by this version prepared by the same author. This note was prepared as the basis for class discussion. Copyright © 2010, 2011, 2012 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1- 800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School. Assessing a Company’s Future Financial Health Assessing the long-term financial health of a company is an important task for management as it formulates goals and strategies and for outsiders as they consider the extension of credit, long-term supplier agreements, or an investment in a company’s equity. History abounds with examples of companies that embarked on overly ambitious programs and subsequently discovered that their portfolios of programs could not be financed on acceptable terms. The outcome was frequently the abandonment of programs mid-stream at considerable financial, organizational, and human cost. It is the responsibility of management to anticipate a future imbalance in the corporate financial system before its severity is reflected in the financials, and to consider corrective action before both time and money...
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...| | Karachi School For Business & Leadership | MBA Class Of 2016 | Weekly Schedule for September 22nd till September 28th , 2014 | | | | | | | | | | | Term I - Week Two | Monday September 22nd | | 08:30 – 08:55 | Group DiscussionFinancial Reporting & Analysis I Break Out (1-6) | | | 09:00 – 10:30 | Financial Reporting & Analysis I Dr. Zeeshan Ahmed Venue (Lecture Room 1) | | | | Topic : 1) Long lived assets and their amortization | | | | Case : 1) Depreciation at Delta and Singapore Airlines | | | | Reading : 1) Long-lived Fixed Assets | | | 10:30 – 10:45 | Tea Break | | | 10:45 – 11:10 | Group DiscussionMarketing Management I Break Out (1-6) | | | 11:15 – 12:45 | Marketing Management I Dr. Jawaid Abdul Ghani Venue (Lecture Room 1) | | | | Topic : 1) Brand Extensions | | | | Case : 1) Flare Fragrances | | | | Reading : 1) Ch 7: Identifying Market Segments and Targets | | | 12:45 – 13:45 | Lunch & Prayer Break | | | 13:45 – 14:10 | Group DiscussionManagement Practice Break Out (1-6) | | | 14:15 – 15:45 | Management Practice Dr. Rizwan Amin Sheikh Venue (Lecture Room 1) | | | | Topic : 1) How to Create Motivation in Organizations | | | | Reading : 1) HBS Note: The Motivation for Creativity in Organizations | | | 15:45 – 16:00 |...
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...pay for a good or a service True Page: p35 2. A firm’s Value Added is the difference between the value of its outputs and the total costs of the inputs purchased by the firm to provide these outputs True Page: p35 3. One way of creating value by a firm is its “Commerce” activity, which transforms raw material and intermediate products into final products False Page: p35 4. Most of the tools used by top decision-makers in the corporate world are based upon the central assumption of profit maximization True Page: p35 5. There are different ways of measuring a firm’s profitability. Different measures of profitability are likely to result in very different rankings of firm performance True Page: p37 6. Economic profit is a better indicator of a firm’s performance than accounting profit because economic profit includes the cost of remunerating of the capital employed by the firm False Page: p36 7. Time is an important factor in assessing a firm’s performance True Page: p39 8. If time enters into the equation, the maximization of profit equates the maximization of the firm’s value, where this value is equal to the Net Present Value of the firm’s cash flows False Page: p39 9. In practice, valuing firms by discounting economic profits leads to the same result as by discounting the firm’s net cash flows True Page: p40 10. In fact,...
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...Analyzing the External Environment of the Firm Chapter 2 1) Because of to minimize or eliminate threats and exploit opportunities, so managers should analyze the external environment 2) This involves a continuous process of environmental scanning and monitoring as well as obtaining competitive intelligence on present and potential rivals. These activities provide valuable inputs for developing forecasts. In addition, many firms use scenario planning to anticipate and respond to volatile and disruptive environmental changes. 3) The general environment consists of factors that can have a dramatic effect on a firm's strategy. Typically, a firm has little ability to predict trends and events in the general environment, and even less ability to control them. We divide the general environment into six segments: demographic, socio-cultural, political/legal, technological, economic, and global. A. THE DEMOGRAPHIC SEGMENT Demographics are the most easily understood and quantifiable elements of the general environment. Demographics include elements such as the aging population, rising or declining affluence, changes in ethnic composition, geographic distribution of the population, and income level disparities. B. THE SOCIOCULTURAL SEGMENT Socio-cultural forces influence the values, beliefs, and lifestyles of a society. Examples include a higher percentage of women in the workforce, dual-income families, increases in the number of temporary workers, greater...
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...Industry Environment: The computer industry includes all of the world's businesses that are involved in manufacturing, developing, selling, and maintaining computer hardware and software, computer accessories, and network infrastructures. Many economic and financial experts believe this to be one of the most quickly growing and profitable industries in existence. Computer industry analysis is the practice of monitoring the industry for trends, technological developments, and potential risk. The monitoring of trends is an important part of computer industry analysis. Trends can refer to a number of different factors that impact pricing, manufacturing, and investments related to the industry. The world PC industry expanded 6% in 2010 to exceed $175 billion, according to MarketLine. The market is expected to fall to just over $174 billion in 2015, marking more than a 0.5% decline. The industry is expected to exceed 446 million units in terms of volume in 2015, representing a near 52% increase compared with 2010. The Americas represent almost 40% of the overall market, which is highly competitive due to large scale outfits and a diverse market environment. The computer industry market also has trends that can be monitored and recorded in computer industry analysis. Factors such as stocks, investments, and pricing may be taken into account. This information can serve relevant businesses in forming business plans and strategies concerning when to introduce products, how to price...
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...1. EXECUTIVE SUMMARY Financial analysis is the starting point for making plans, before using any sophisticated forecasting and planning procedures. Understanding the past is a prerequisite for anticipating the future. Financial analysis is the process of identifying the financial strength and weakness of the firm by properly establishing relationship between the items of the balance sheet and the profit and loss account. Financial analysis can be undertaken by management of the firm, or by parties outside the firm, viz. owners, creditors, investors and others. The nature of analysis will differ depending on the purpose of the analyst. 1. Investors: Who invested their money in the firm’s shares, are most concerned about the firm’s earnings. They more confidence in those firm’s that show steady growth in earnings. As such, they concentrate on the analysis of the firm’s present and future profitability. They are also interested in the firm’s financial structure to that extent influence the firm’s earning ability and risk. 2. Trade creditors and financial institution: they are interested in firm’s ability to meet their claims over a very short period of time. Their analysis will, therefore, confine to the evolution of the firms liquidity position. And the financial institutions are interested in the financial statements of the borrowing concern to ascertain its short- term as well as long-term solvency and also it profitability. 3. Suppliers: On the other hand, are concerned...
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...Assessing a Company’s Future Financial Health SciTronics Inc. Case #1 Prepared by: Kyle Peck For: Babak Lotfaliei FIN423 MW:10am-11:50am 2/11/15 Table of Contents Company Overview 3 Fundamental Analysis 3 Asset Utilization 3-4 Liquidity and Leverage 4-5 Conclusion 5 Appendices 6-15 Company Overview My group was called upon to analyze the financial statements and performance of SciTronics Incorporated, a medical industry company that supplies high quality products to various corporations. Initially, after analyzing their balance sheet ranging from the years 2005 through 2008, the company has clearly progressed and the 2008 numbers look a lot better than those of 2005 (see Appendix D). To analyze this data, we used numerous sources of financial information that included the firm’s financial ratios, various business cycles, and their source of external financing as well. Fundamental Analysis One important number that was really impressive was the dramatic increase in SciTronic’s overall sales. Using the calculations from the ratios, SciTronics’ sales jumped up at an approximately 20.77% compound rate. Furthermore...
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...Assessing a Company’s Future Financial Health In this case the concentration is on “Company Performance Measurement”, using the “Ratios”, before we answer to the question, we have to focus a bit on the “Financial Ratios” Sales Growth: The increase in sales over a specific period of time, often calculated annually. In this specific Case, that has asked the Sale growth for the four-year period, can be calculated as bellow; ((Ending Value)/(Beginning Value) )^((1/(# of Year)) )-1 = ($244,000/$115,000) = (1+r) ^4 compound rate, = 21% Profitability Ratios: it shows how profitable the Company is; Profits as a percentage of sales in 2008; Income/Sale = 14000/244000=0.0573*100=5.73% Profits as a percentage of sales in 2005; Income/(Sale )= 5000/147000 = 0.0340 *100 =3.4% This shows an increase of 2.3% from the beginning (2005). 3. SciTronics had a total of $112, 000 (75,000+20,000+7,000+10,000) of capital at year-end 2008 and earned before interest but after taxes (EBIAT) 16,000 (26,000-10,000) during 2008. Its return on capital was 14.29% (16,000/112,000) which represents an increase from the 8.11% (6,000/74,000) in 2005. 4. SciTronics had $75,000 of owner’s equity and earned $14,000 after taxes in 2008. Its return on equity was 18.66% ($75,000/$14,000) an improvement from the 8.1% ($5,000/$61,000) earned in 2005. Activity Ratios 1. Total Assets turnover for SciTronics in 2008 can be calculated by dividing $244,000 (net...
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...D’Leon, Inc. Part II Summary: 1- Analysis Report and Conclusions………………………………………………………………2-4 2- Questions to aid in analyzing the case………………………………………………………5-13 3- References……………………………………………………………………………………………….13 0 D’Leon Case Part II Analyzing the company’s financial statements we came to the conclusion that its current ratio estimated for 2011 is of 2.3 and its quick ratio of 0.8, same as those in 2009. Both ratios estimated are above the current ones in 2010 (of 1.2 and 0.4 respectively). The inventory turnover ratio estimated for 2011 is of 4.1 if calculated versus sales. This indicates that the company will have an excess of inventory in regards to its sales. It is important to note that such inventory is made up of perishable products and therefore may become a cost for the company. Therefore, the company would profit from adjusting and reducing its inventories. Reducing inventories will affect the costs of goods sold (which would also be decreased). Moreover, such decrease in the cost of goods sold increases the firm’s profitability. It is important to keep in mind that we are reducing excess inventories and therefore this adjustment will not be reflected in a decrease in sales. In terms of days of sales outstanding, we realized that D’Leon in 2011 will collect the money its customers pay (when they buy on credit) in 45 days. This represents an opportunity cost since if the company received that cash earlier on it might be able to use it in other...
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...and provide data measuring the performance of the firm, assessing its financial position, and paying taxes. The accountant is responsible for preparing financial statements such as the income statement, balance sheets, and cash flows. It is normally passive work, in the sense that, the work has a very independent nature to it such as preparing forms and financial statements. It is a good job for people who want to work independently and are very organized (this is only a very brief description, if you are interested in accounting, consult your accounting instructor for more information). Finance: The financial manager or consultant places primary emphasis on decision making. It uses the financial statements prepared by accountants to make decisions about the firm’s financial condition and to advise others about possible losses and profits. In some cases, finance is more a type of leadership position. A financial manager has to deal not only with finance, but also with economics, accounting, statistics, math, and management. For example, people working with stocks and bonds have to understand and analyze how the underlying companies are performing. How a given company is going to perform during recession? Should they sell or buy stocks or bonds. How a decrease in the interest rate in England may affect the projects a company has in that country. Finance also deals a lot with risk. Derivative securities (options, futures, swaps, etc) are used to hedge against possible increase...
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...Their Business Risk Prepared by: Timothy Supandji Table of Contents EXECUTIVE SUMMARY 3 Factors in understanding company and business risk before accepting as New Client 4 Comparison of the Overall Financial Conditions of BHP Billiton Ltd and Rio Tinto Limited during the GFC 6 Explanation of risks associated with BHP and Rio Tinto Ltd during GFC 8 Managing Business Risk: BHP Billiton Ltd Vs Rio Tinto Limited 10 CONCLUSION 11 EXECUTIVE SUMMARY There are four purposes for this report. It attempts to provide description of what factors that the auditors need to consider in understanding a company and assessing business risk before attempting any audit work on a particular client. The second aim is to explain the comparison of financial conditions between BHP Billiton Ltd and Rio Tinto Limited during the Global Financial Crisis that occurred in 2007 to 2008. Further, the risk that is associated with BHP and RIO during the Global Financial Crisis will be explained. Finally, this report intends to explain of which company is better in handling and managing the business risk during the Global Financial Crisis. Factors in understanding company and business risk before accepting as New Client Generally speaking, at the time when there was a Global Financial Crisis, it has detrimental effect to the companies globally with downfall of share prices. Because of these results, all of the investors are forcedly lost their money. In addition to this, the global economic...
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...EXECUTIVE SUMMARY UST Inc. is a principal producer of moist smokeless tobacco products, controlling roughly 77% of the overall market, and widely known for its conservative debt policy and high dividend payout. UST also has an exceptional financial performance as net sales has been growing at 11% compounded annual growth rate, and cash flows have been growing at 12% compounded annual growth rate for the past 10 years. However, UST’s board of directors approved a plan to borrow up to $1 billion over five years to accelerate its stock buyback program in December 1998. Although this debt policy benefited UST in term of additional tax shield and rise in stock market price, however, the debt would directly increase financial distress and weaken UST’s cash flow. This report is prepared to consider debt policy for assessing a leverage recapitalization for UST and evaluate effect of dividend payment from buyback policy. After carefully evaluation of available information and using finance literature and relevant course lectures to conduct financial methodologies, including Unlevered beta, Value of levered firm with Financial Distress, Weighted Average Cost of Capital Analysis for Capital Structure Choice, and Proforma, I recommend UST to implement its one billion dollars buyback program in a period of five years. OVERVIEW OF UST Over the years, UST has been named the most profitable company in America in 1998 by Dreman Asset Management as measured by return on equity, return on...
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