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[Applause]
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chemalite Incorporated s profitability
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and
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solvency
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introduction chemalite Incorporated
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deals with the production of glow light
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by using a number of chemicals Bennett
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invented the company with a toal capital
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of
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$500,000 he brought a number of
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investors on board in order to raise the
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capital the business commenced on
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January 2nd
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2003 however by June 30th the capital
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that had been raised dropped
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significantly since the bank balance of
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$375,000 decreased the investors were
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convinced that the business was not
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doing well since there was no revenue
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generated during this period however in
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the second half of the year the company
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made some sales and the investors
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thought that the business was performing
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well the bank balance dropped further to
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$13,000 and the investors were still
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concerned about the performance of the
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business despite the progress made even
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though the cash balance dropped a closer
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review of the company shows that it is
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profitable further the cash balance of $
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113,000 at the end of the first year of
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operation shows that the company is
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solvent in addition the loans borrowed
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were cleared during the first year of
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operation this shows that the company
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has a bright future and should continue
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its operations in the
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future
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profitability when evaluating the
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profitability of an entity a lot of
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emphasis is laid on the income statement
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specifically the items that will be
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analyzed are the gross profit operating
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profit and net income from the raw data
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for the first year of operation that is
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provided by the management of chemalite
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Incorporated it is possible to prepare
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the income statement and the balance
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sheet the value of gross profit at the
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end of the first year of operation
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amounted to
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$29,000 the operating income was
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$4,125 while the net income total
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$39,375
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from the income statement a number of
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ratios can be computed in order to
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evaluate the profitability of chemalite
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Incorporated these ratios are gross
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profit profit margin operating profit
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margin net profit margin return on
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assets and return on Equity the
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estimated balance of total assets is
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$539,500 margin is estimated at
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5.22% when the ratios are compared with
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the industry average it can be observed
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that the company performed fairly well
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the gross profit margin for the
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equipment industry in 2003 was 25.5 6%
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the operating profit margin was 5.2% and
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the net profit margin was
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3.34% thus it can be noted that the
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performance of chemalite Incorporated in
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2003 was fairly higher than the industry
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average this shows that the company is
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profitable and should continue its
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operations in
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2004 the return on Equity assets was
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7.3% the ratio measures the ability of
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the management to effectively handle
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resources available in the organization
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and their ability to generate positive
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returns from the Investments made by the
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shareholders a positive ratio of 7.3%
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for a company that has been in operation
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for only one Financial year is quite
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favorable
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it shows that once the product has
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penetrated the market well the company
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will be able to generate higher returns
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for the
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shareholders
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solvency solvency is a vital element
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when evaluating the performance of an
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organization it presents a good yard
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stick that can be used to measure the
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ability of the company to continue with
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operations in the future because it
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gives information on the ability of the
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company to pay the long-term
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obligations therefore the solvency
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position of the company will be analyzed
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by Computing two ratios these ratios are
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the interest coverage ratio and debt to
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equity ratio the interest coverage ratio
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for chemalite Incorporated in 2003 was
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53.5 this implies that in the first year
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of operation chemalite Incorporated was
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able to pay the interest expense 53.5
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times the operating income this implies
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that the company is solvent the industry
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average for the interest coverage ratio
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was 28
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.97 this shows that the solvency level
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for the company is higher than the
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industry in the case of the debt to
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equity ratio the value in 2003 was 0%
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since the company did not have debt at
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the end of the financial year this shows
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that the leverage level of the company
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is zero the industry average for the
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ratio is
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35% a low leverage level gives the
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company room to borrow more money for
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future expansion and for investing in
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opportunities that may arise in the
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future
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the valuation of cash flow and liquidity
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is of great
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significance the case study shows that
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chemalite incorporated generated
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positive cash flow during the two
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accounting periods at the end of the
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financial year the company had a cash
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balance of
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$113,000 the value is quite favorable
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for a new company further a review of
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the transactions for the first year
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shows that the company did not have
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liabilities this translates to a high
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liquid liquidity level therefore zero
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debt High liquidity positive cash flow
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and a high solvency level will give the
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company stability and an opportunity to
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grow in the future therefore a review of
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profitability and solvency shows that
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the company should continue its
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operation in 2004 and
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Beyond strong
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Outlook the calculations in the sections
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above show that chemalite incorporated
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has a good financial performance in
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terms of profitability and solvency
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the future of the business is bright
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because currently they have an order for
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the Olympic Games in Athens the Olympic
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Committee placed an order for 60,000
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chales the price of each chemalite is
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$11.50 this shows that the company will
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earn revenue of $90,000 from the order
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in 2004 besides this order will improve
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the publicity of the product in the
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bottom line further a review of the
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inventory shows that the company had a
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balance of 55,000 raw materials this
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will enable the company to manufacture
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more than enough chal Ides for this
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order therefore the company has a high
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potential of generating more profit at
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the beginning of 2004 another area to
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look at is the duration of the patent
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the patent is still valid for an
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additional four years thus the company
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has four years to be the sole producer
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of ches and to build to its brand this
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will grant the company a competitive
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advantage in the Market at the end of
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the 5
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years thirdly the value of the Prototype
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is likely to go up this has the
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potential of increasing the future
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bottom line of the company therefore the
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business should continue because it has
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a bright
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future
