Advanced Medical Technology Essay Example

market. This led to annual sales growth of over 30%. In order to address these financial pressures, management heavily relied on short-term credit and leased certain manufacturing facilities. To further support their operations, they also established a partnership with Biological Labs, Inc.

Mr. Haskins was dissatisfied with the company's current loan arrangement of $MM with Sunnyvale Bank, in which accounts receivable and inventory were used as security. He believed that the bank's restrictive attitude was hindering the company's ability to expand just when increasing volume was crucial for profitability. Mr. Haskins hoped that WIN would provide the loan, under the condition that all borrowings from Sunnyvale Bank would be fully repaid. The company's sales were made to over 3,000 hospitals, clinics, and doctors, and credit was extended on net 30 terms without any investigation.

However, slow payment appeared to be a competitive reality. As of December 31, 1985, Mat's accounts receivables included $1.8 million owed by foreign customers, which accounted for 27% of the total. The problem at hand is whether Western National Bank should approve Advanced Medical Technology Corporation's loan request. In order to justify Tom Winter's decision, the group needs to: 1. Evaluate the company's credit history and conduct external analysis; 2. Analyze the company's financial statements from the past three years; 3.

The text discusses the evaluation framework used to determine the creditworthiness of MAT. The group would assess the availability of loan collateral and provide an income statement forecast for the next year. The framework employed is the 5 Co's of credit, which considers five characteristics of the borrower - Character, Capacity, Capital, Collateral, Conditions. An analysis of Mat's financial ratios

from their 3-year financial statement and a one-year forecast would be generated to quantify the C ramekin.

Analysis, including the use of common size financial statements, trend analysis, and comparisons to industry average, was conducted. The evaluation of MAT was done using the 5 Co's of credit framework. Character: Mr. Haskins, the hands-on president, personally facilitated Mat's loan application. Both the loan officers from Bank of San Francisco and Bank of the West have a high opinion of his management skills. However, the loan officer from the former bank is cautious about MAT's highly leveraged position and is unwilling to extend any more loans. The group acknowledges Mr...

Haskins, an able manager at Sunnyvale, the bank where MAT currently has an account, expressed dissatisfaction with their experience with MAT. The company consistently maintained very low balances or even overdrawn their account on occasions. Additionally, the bank did not consider MAT as a low-risk debtor since the securities they pledged did not meet the requirements for acceptable collateral. MAT's Character rating is neutral. Capacity to meet obligations was assessed using Liquidity, Efficiency, and Profitability ratios, along with a one-year forecast. This analysis falls under Financial Statement Analysis.

The analysis of MAT's balance sheet reveals an abnormal asset structure, with current assets as the dominant factor. In 1983, current assets made up 83% of the total assets, while in 1984 and 1985 they accounted for 75% and 84%, respectively. This composition was primarily influenced by significant balances in accounts receivable and inventory over the past three years. Exhibit 3 clearly demonstrates a decreasing trend in the company's current ratio. In 1983, the current ratio was at 2.57,

which declined to 1.11 in 1984 and further dropped to 1.78 in 1985.

The company's rent ratio indicates that it has enough liquidity to meet short-term obligations. However, the quick ratios decreased significantly from 1.28 in 1983 to 0.30 in 1984 and 0.54 in 1985, suggesting that a large portion of current assets were held as inventory and may not be easily converted into cash. The company's accounts receivable days outstanding, inventory days outstanding, and cash conversion cycle mentioned in Exhibit 3 also indicate a longer operating cycle and cash conversion cycle.

According to Exhibit 3, the company has a low accounts receivable turnover ratio and inventory turnover ratio. This implies that converting receivables and inventories into cash may be challenging. Furthermore, both the operating cash flow and cash balance are negative. Additionally, as shown in Exhibit 1, a considerable portion of the company's liabilities consists of bank loans which were likely utilized for financing research and development expenses.

According to Exhibit 2, Mat's financial performance has shown improvement in the last three years. Hough's gross profit ratio increased from 48% in 1983 to 55% in both 1984 and 1985. However, the company also experienced a growth in net loss - from $1,290 in 1983 to $1,176 in 1984 and finally reaching $1,487 in 1985. This increase can be attributed to Mat's aggressive strategy of investing heavily in research and development (R&D) to gain a larger market share. In terms of profitability, the company's two segments are close to breaking even by the end of 1985. On the other hand, the third division which holds significant growth potential but faces market positioning issues is currently

facing substantial losses.

The selling and administrative expenses (AS) and R increased from 57% to 66% between 1983 and 1984, but then decreased to 60% in 1985. It is important to highlight that the R expenses alone grew from 9% in 1983 to 13% in 1984 and ultimately reached 14% in 1985. These costs are crucial for businesses like MAT as they represent future innovation, but they should be managed efficiently.

Despite experiencing net losses, the company's net profit margin has consistently improved over the years. In 1983, the net profit margin was -9.7%, which improved to -5.44% in 1984 and further improved to -4.82% in 1985. This indicates that the company's net income is likely to continue improving annually.

However, despite this positive trend, MAT is still expected to have net losses in the following years due to its growth rate. As a result of consecutive losses, MAT also had negative return on equity (ROE) of -0.30 and return on assets (ROAR) of -0.19 shown in Exhibit 3. However, it is worth noting that ROE and ROAR significantly improved from their negative values previously mentioned.

Leverage Review revealed that the company's debt-to-equity ratio increased from 0.62 in 1983 to 2.67 in 1984, indicating a risky trend of relying heavily on borrowings for growth. This high ratio suggests that MAT may struggle with meeting its obligations and attracting additional lending capital. However, in 1985, the company improved its equity position and reduced the debt-to-equity ratio to 0.2. Additionally, net losses incurred over the past three years resulted in a negative interest coverage ratio, making it challenging for MAT to meet interest payment obligations and obtain approval

for further loans from creditors. To assess the ability of the company to repay a loan they were seeking, the group decided to forecast MAT's 1986 Income Statement based on its past performance.

Specific assumptions are as follows: Sales Growth is 30%, which is the same as the company standard and conservative compared to Mat's YOU growth. The COGS ratio will be 47% of sales, based on their 3-year company average. AS&A expenses will be 9% of sales, also based on their 3-year company average. R&D will be 12% of sales, based on their 3-year company average. Operating Lease amounting to 2,500 will be due at the end of the year. The base of Interest Expense will be the existing loan amounting $6 million, with an annual interest expense of 10.57%. According to Exhibit 4, MAT is expected to have a net loss of 6,146 in 1986, which is significantly lower than the past three years.

The projected figures indicate that the company may struggle to meet its outstanding debt payments, highlighting a capacity issue. Additionally, MAT's leverage ratio has risen from 1.98 in 1983 to 2.67 in 1984, which assesses its capital and suggests heavy reliance on borrowed funds for expansion. This trend could be risky as it is uncertain if MAT can sustain growth and fulfill obligations with a high debt-to-equity ratio. Consequently, attracting additional lending capital becomes difficult.

In 1985, the company managed to enhance its equity position from the previous year by lowering its debt-to-equity ratio to 0.92 through approval from creditors. Nevertheless, MAT encountered capital difficulties and had the opportunity of utilizing accounts receivables, inventories, and investments as collateral at

a value of around $6 million according to the balance sheet of that year. However, when examining the aging of accounts receivable in 1985, a different narrative unfolds.

It appears that the company's credit policies were not adequately established. When examining Mat's AR days outstanding and AR turnover ratio, it becomes evident that a significant portion of its sales are not being collected promptly, indicating potential issues with customer credit history. As a result, accounts receivable become less appealing to creditors. Additionally, Sass's inventory balance of $9.76 million seems favorable to creditors. However, the inventory days outstanding and inventory turnover ratio indicate poor inventory management, which also discourages creditors.

The investment of MAT, which amounts to a little over $1 million, may provide some security for WIN. However, this amount is not enough to cover the loan request of $8 million. MAT did not meet the Collateral criteria. Based on an external analysis, government policies and incentives have greatly contributed to the advancement of the medical device industry. In the sass, the United States became a leader in biomedical innovation, thanks to policy incentives provided by the federal government.The Bay-Dole Act allowed businesses with federal research contracts to have exclusive rights to the intellectual property they created for further development and centralization. Another significant piece of legislation was the Drug Price Competition and Patent Term Restoration Act of 1984. The US became a leader in the medical device industry due to the absence of price controls, clear regulatory approvals, a well-structured intellectual property system, and the ability to attract foreign scientific talent to top research universities. According to a 25-year study, the compounded annual growth rate

of the medical device industry was 12.12%, increasing from MM in 1958 to 17,MM in 1983. The demand for medical devices was high in both domestic and foreign markets, indicating a promising future for the industry. The continuous growth in foreign market demand further enhances the industry's potential. The company successfully met the credit history requirements and collateral conditions. During the sass, the United States emerged as a leader in biomedical innovation.The Bay-Dole Act, which was a result of federal government policy incentives, granted businesses with federal research contracts exclusive rights to their intellectual property for further development and centralization. In 1984, the Drug Price Competition and Patent Term Restoration Act was also passed. Due to the absence of price controls, clear regulatory approvals, an effective intellectual property system, and the ability to attract foreign scientific talent to outstanding research universities, the United States became a leader in the medical device industry. From 1958 to 1983, this industry experienced a compounded annual growth rate of 12.12%, with revenue increasing from MM to 17MM. Medical devices were highly sought after both domestically and internationally, making it one of the top exports for the country.

According to the company's projected income statement for 1986:
- Cost of goods sold will account for approximately 47% of sales based on their three-year average.
- Selling, general and administrative expenses will represent around 49% of sales based on their three-year average.
- Research and development expenses will amount to roughly 12% of sales based on their three-year average.
- There is an operating lease totaling $2,500 that will be due at the end of the year.

The company's interest expense is a cause for concern

as it has borrowed $6 million over the past three years. The projected figures suggest that meeting payment obligations for their existing debts may pose a challenge. Therefore, the group recommends against approving the requested line of credit worth $8 million. This decision is supported by an evaluation of the 5 Co's of credit, which reveals that although the company satisfied the Condition criteria due to favorable government policies and a growing domestic market, it did not meet expectations in other aspects.

Haskins' management skill has the potential to enhance the company's financial position. However, the remaining three criteria carry more significance as they objectively measure the company's creditworthiness. MAT did not meet the Capacity requirement due to its high cash conversion cycle, declining efficiency ratios, and negative profitability ratio, resulting from the majority of its assets being held as receivables and inventory. Additionally, it failed to meet the Capital requirement mainly due to a negative interest coverage ratio.

The company demonstrates that the collateral consists of items with a low turnover rate, meaning it would take a while to convert them into cash. Additionally, in the medical device industry, unsold inventory can become obsolete within two years, posing a risk to the bank. The financial statement analysis predicts that the company will continue to have negative returns and profits in the upcoming years. This is due to its substantial assets and significant investment in research and development (R), resulting in excessive operational expenses and net losses.

Considering MAT's reduced liquidity and increased financial leverage, providing more lending funds to the company poses a risk to WIN. The ability of MAT to repay debt and

interest obligations is questionable. Although the president of MAT is optimistic about sales growth, it may not be sufficient for the company to turn a profit from its assets and investments. Consequently, it is likely that MAT will face challenges in managing and repaying this loan.

PERSONALIZATION As a lending company, WIN advises MAT to take the following actions to increase its credit line: 1. Minimize General, Selling & Administrative, and Research & Development expenses. Mr. Haskins' negative attitude towards the company's market position is detrimental in the long run. Instead of spending heavily on R&D and decreasing prices to maintain market share, he should increase prices for high-tech instruments and align R&D costs with the industry average. MAT may also consider reducing AS&A expenses by implementing cost-effective development techniques.

The company needs to make thoughtful decisions regarding their investments. They need to effectively manage their limited resources and prioritize activities that are in line with their business strategies. Additionally, reviewing credit policies is important. Analyzing Mat's accounts receivable (AR) days outstanding and AR turnover ratio reveals that the company should enhance its control over receivables. This is necessary because the data indicates that a significant portion of sales is not being collected promptly, resulting in insufficient cash flow.