Essay About Profitability Ratio And Market Averages

Managing a Technology-Based Business
Essay Preview: Managing a Technology-Based Business
Report this essay
TECE 6200 Managing a Technology-Based BusinessAjax EletronicsBarbara FeitosaProfessor: Ted Clark06/15/2015The Ajax Electronics case show us the problems faced by Ajax Company in its attempt of borrowing money from a bank. Bob Roberts is the owner of the company that produces industrial sensors and defibrillators. Over the past years, he had achieved a gross margin of 40% with the production of sensors, but after his decision to produce defibrillators his gross margin was, since 1997, always below this value. As a profitability ratio, the gross margin show us that the decision to produce the defibrillators is not being a success generating profits to the business. Considering the business, we can perceive that it has as strengths: Robert’s competence from technical standpoint;The plant capacity can be increased by 40% without increase in expenses;The company’s sensor product do not have competition;Roberts has friends that can help him out with loans;In addition, the business also has as weaknesses: Only produce low-end defibrillators and the gross margin (25%) is way below compared to other manufactures (40%);Webster bank arbitrarily selected the receivables they would accept as collateral;Roberts lacked financial and administrative skills;To analyze if the bank can trust and give to Robert the loan he have asked I have analyzed different financial ratios and compared them to the market averages. After that, I would recommend that SaveMe Banck do not give Roberts the loan. Some of the analyzed ratios to conclude the negative answer are shown below:Current ratio: This is a liquidity ratio, so the result found will show as the ability of the business to generate cash to pay its bills in a short term. To found this ratio I used the current assets and current liabilities over the past years. I did a horizontal analysis using the different periods showed on the balance sheet, and we can conclude that the ratio is decreasing year after year. For example, considering the last 3 years (2000, 2001 and 2002) the ratios were respectively 1.86, 1.63 and 1.51. Accounts receivable: This is a measure of the activity (efficiency) of the firm, to find how quickly the firm collects its accounts receivables. To find the expected number of days I have used first the Receivables Turnover ratio (considering the last 2 years 2002 and 2001), which I found 3.55. Then I have used the Average Collection Period ratio, dividing 365 by The Receivables Turnover Ratio found before. I got 102.81 days, which means 103 days, and that is higher than the average number of the days in the market (80 days).Inventory: This is another measure of the activity of the firm. I have calculated the Inventory Turnover Ratio to compare with the average of 4.0 in the medical instrument supply sector. The higher this ratio the better it is, because implies strong sales. To calculate the Inventory Turnover Ratio I have used the projected Cost of Goods sold for 2002, which means 416, and divided by the Average Inventory from the balance sheet (which I found 177.33). The ratio came up to be 2.34, what is smaller than the average industry of 4.0. In addition, a low turnover is usually a bad sign because products tend to deteriorate as they sit in a warehouse.Profit Margin on Sales: This profitability ratio is a good indication of the business success. Using the comparison with the industry average annual growth rates, ranging from 10% – 30% we can see that Ajax are doing nothing above average. Considering the % change in sales over the years we can see that 2 out of 5 times Ajax was below the minimum industry average of 10%, 2 times out of 5 is was on average and only 1 time it was above the 30%.    Accounts payable: From the excerpts from responses to letters of credit, we can see that suppliers think that Ajax has a slow payment process and most of them now only sell on COD. In the past, the payments have been met in approximately 60-90 days. If we compare this average with the industry, it is too high. Ajax take too long to pay the suppliers when compared with the 20-60 days average of the market.  As we can see, the company has a lot of financial and management problems that must be solved to continue growth. Ajax Electronics has also no competition on sensors market, it has a huge potential in the market of defibrillators and another good point is that it has an owner that is careful and oversees the companys future. Thinking about that some advices that Mr. Smith could give to Mr. Roberts are: