lOMoARcPSD|22046877
lOMoARcPSD|22046877
1. What was Chem-Med’s rate of sales growth in 2015? What is it forecasted to be in 2016,
2017, and 2018?
Sales this year−Saleslast year
Sales Growth= Saleslast year ∗100 %
3814−3051
2015: Sales Growth= ∗100 %=25 %
3051
5340−3814
2016: Sales Growth= ∗100 %=40 %
3814
7475−5340
2017: Sales Growth= ∗100 %=40 %
5340
10466−7475
2018: Sales Growth= ∗100 %= 40 %
7475
2. What was Chem-Med’s net income growth in 2015? What is it forecasted to be in 2016, 2017,
and 2018? Is projected net income growing faster or slower than projected sales? After
computing these values, take a hard look at the 2016 income statement data to see if you want
to make any adjustments.
Net incomethis year −Net incomelast year
Net income Growth= Net income last year ∗100 %
1159−766
2015: Net income Growth= ∗100 %=51 %
766
1609−1150
2016: Net income Growth= ∗100 %=40 %
1150
1943−1609
2017: Net income Growth= ∗100 %=21 %
1609
2903−1943
2018: Net income Growth= ∗100 %=49 %
1943
lOMoARcPSD|22046877
3. How does Chem-Med’s current ratio for 2015 compare to Pharmacia’s? How does it compare
to the industry average? Compute Chem-Med’s current ratio for 2018. Is there any problem
with it?
Current Assets
Current Ratio =Current Liabilities
1720
Chem-Med (2015): Current Ratio = =2.9
593
Pharmacia (2015): Current Ratio =2.8
Chem-Med Current Ratio for 2015 is 0.1 higher than Pharmacia Current Ratio.
Industry (2015): Current Ratio =2.4
Chem-Med has a higher current ratio than its peers, indicating that management may
not be using its assets efficiently.
3261
Chem-Med (2018): Current Ratio = =1.98
1647
Chem-Med's current ratio is lower than its peers, may indicate a higher risk of
distress or default.
4. What is Chem-Med’s total debt-to-assets ratio for 2015, 2016, 2017, 2018? Is any trend
evident in the four-year period? Does Chem-Med in 2015 have more or less debt than the
average company in the industry?
Total Liabilities
Total debt −¿−assets ratio=
Total assets
614
Chem-Med: 2015: Total debt −¿−assets ratio= =0.1367
4491
857
2016: Total debt −¿−assets ratio= =0.13 51
6343
1212
2017: Total debt −¿−assets ratio= =0. 1402
8641
1664
2018: Total debt −¿−assets ratio= =0.13 87
11995
The debt-to-assets ratio was pretty consistent over the four-year period.
Debt is being maintained in an effective way.
Industry: 2015: Total debt −¿−assets ratio=0.52
Chem-Med in 2015 had less debt than the industry average.
lOMoARcPSD|22046877
lOMoARcPSD|22046877
5. What is Chem-Med’s average accounts receivable collection period for 2015, 2016,
2017, 2018? Is the period getting longer or shorter? What are the consequences?
Account Receivable
Account receivable collection period = ∗365
Sales per day
564
2015: Account receivable collection period = ∗365=54 days
3814
907
2016: Account receivable collection period = ∗365= 62days
5340
1495
2017: Account receivable collection period = ∗365=73 days
7475
2351
2018: Account receivable collection period= ∗365=82 days
10466
Chem-Med's average accounts receivable collection period is getting longer from 54 days (2015) to 62
days (2016) to 73 days (2017) to 82 days (2018).
Various consequences that a firm will face due to the collection period getting longer are:
A longer operating cycle.
Lower liquidity.
Requirement of more investments in working capital.
Risk of increased bad debts.
Risk of failing to meet short term financial obligations
6. How does Chem-Med’s return-on-equity ratio (ROE) compare to Pharmacia’s and the
industry for 2015? Using the Du Pont method, compare the positions of Chem-Med and
Pharmacia. Compute ROE for each company using the following formula:
1− Debt
margin∗Asset turnover
ROE=Profit ¿ assets ¿
Compare the results to determine the sources of ROE for each company.
Net Income
ROE= Total Equity
Net Income
Net Profit Margin=
Net Sales
Net sales
Assets turnover=
Total assets
lOMoARcPSD|22046877
2015 Chem-Med Pharmacia Industry
1150
Profit margin 3814 =30 % 5% 7%
3814
Assets turnover 4491 =85 % 1.9 1.18
Debt to assets 0.1367 0.55 0.52
ROE 30% 29.56% 12.29%
Compare the results to determine the sources of ROE for each company.
Pharmacia has a lower asset turnover than Chem-Med indicating that it has low
profitability.
Chem-Med is making higher profits and income.
The industry is having a lower return on equity.
