Analysis Results for Harvard Business School Article - Assessing a Company’s Future Financial Health

Analysis results for Harvard Business School Article:

Assessing a Company’s Future Financial Health

Abstract

This analysis aims to address three topics about the Harvard business school article “Assessing a Company’s Future Financial Help”: 1) The long-term financial health of a corporate financial system; 2) Evaluating the financial health of SciTronics from the years 2005 to 2008 based on the calculation results of the company’s income statement and balance sheet; and 3) Pairing five company industries to their unlabeled financial data information. It begins with discussing the structure of how to analyze a company’s financial health and the steps used in the corporate financial system. Then SciTronic’s company health is broken down from 2005 to 2008 based on its sales growth, profitability, activity, leverage, liquidity and another look at its profitability. Throughout these calculations SciTronics shows positive signs of growth in almost all aspects and have decreased their financial riskiness resulting in a good future financial health conclusion. Finally, the Harvard business school article provides five sets of financial data and five types of industries: electric utility, Japanese automobile manufacturer, discount general merchandise retailer, automated test equipment/systems company and upscale apparel retailer. Several theories are applied to the financial data to help correlate which industry best fits each data set such as a high percentage of receivables, low inventory, percentage of property and equipment, profitability, inventory turnover and many others. In conclusion it was determined that Data Set A correlates to electric utility, Set B to Japanese Automobile Manufacturer, Set C to Discount General Merchandise Retailer, Set D to Automated Test Equipment/Systems Company and Set E to Upscale Apparel Retailer.

1. Company’s Essence of Long-Term Financial Health

There are several things that go into building and maintaining a company’s long-term financial health and it’s up to management to identify each area and evaluate its success. The first thing management should do is identify the company goals. Identifying the company goals allows for everyone to be focused and work in unity to help drive the company toward the completion of those goals. It also establishes a general definition of success so when management comes together quarterly or annually they can look and see what areas are performing above or below their expectation. Once those goals have been established management can now begin to anticipate potential issues that would be counterproductive and can seek to implement corrections before a problem becomes too big or before a potential opportunity passes by.

Analyzing investments is the next step management should focus on. Knowing how the company’s assets are allocated is very useful in determining how the company’s money is being invested. This also establishes a record of past performances to determine if too much money is being held up in accounts such as inventories or plant and equipment and if so why is that the case and what adjustments can be made to correct it. Then a company will want to use the knowledge of past performance to assess the future profitability and competitive performance. Management will need to evaluate if the profitability level can be sustained for a foreseeable future by evaluating past and future markets. This may lead to future external financing needs which should then be evaluated. Also knowing the company’s cash cycle is very valuable because it can reveal areas that need improvement such as long inventory turnover ratios or collection periods. Having a well-established estimate of future sales growth is vital to a company when trying to maintain its long-term financial health by being able to anticipate when additional cash is needed to avoid costly situations when assets or liabilities are tied up.