Medical Technology Company

Excel Exercise #2: Liquidity Management - 2017

Medical Technology Company (MTC) is a New Jersey-based company specializing in manufacturing electronic medical equipment. MTCs products are used in hospitals, clinics and doctors offices. The company was founded by two doctors, Jose Garcia and Steve Picou and began operations in 2005, initially selling their products to local clinics and hospitals, then expanding to the broader U.S. market.

They have expanded significantly in recent years and now sell a small portion of annual sales to companies in Canada, Mexico, and Europe. Due to the high level of demand for their products, they are able to price all of their sales in US Dollars and sales have been growing rapidly (about 25% per year). For the last three years (2014-2016) their profits have been exceptionally strong, but there always seems to be a shortage of cash for their operations.

Even though Jose and Steve have put in extra equity capital, reinvested all net profit back in the business, and used long-term borrowing as much as possible for the expansion of production facilities, they are continually having to make short-term borrowing arrangements with their bank to cover funds shortfalls, sometimes with very little notice.

Examine MTCs current financial position and see if you can determine why they are having these liquidity problems. The firms current financial statements are provided below. Assume a tax rate of 35% and a weighted average cost of capital (WACC) of 10%.

Note: Use end of period figures for ratio calculations rather than average figures.

Specific Questions:

Answer the following questions in your writeup

Why may companies with high growth rates have liquidity problems?

How does the fact that this company is a manufacturer affect its liquidity needs as it grows?

What liquidity problems does this firm have and are they related to either the companys growth and capital structure?

What would you do to solve this companys problems?

Medical Technology Company - Income Statements
All figures in $1,000
	2014	2015	2016
Revenues	35,435	44,294	55,367
Cost of Goods Sold	21,071	25,690	31,006
Gross Profit	14,364	18,603	24,362
General Operating Expenses	4,846	5,594	6,642
Management Salaries	2,964	3,531	3,833
Insurance	1,053	1,214	1,364
Depreciation	1,243	1,561	1,645
Misc. and Other Expenses	993	1,138	1,340
Operating Profit	3,265	5,566	9,538
Interest Expense	2,122	3,825	6,642
Net Profit Before Taxes	1,143	1,741	2,895
Income Tax (35%)	400	609	1,013
Net Profit After Taxes	743	1,132	1,882

Medical Technology Company - Year-End Balance Sheet
All figures in $1,000
Assets	2014	2015	2016
Cash & Equivalents	787	524	72
Accounts Receivable	3,531	5,001	6,983
Inventory	7,166	9,579	12,014
Prepaid Expenses	730	1,053	1,231
Total Current Assets	12,214	16,157	20,300
Fixed Assets (net)	21,351	35,618	51,845
Total Assets	33,565	51,775	72,144
Liabilities & Equity
Accounts Payable	1,750	2,029	2,281
Deferred Taxes & Wages	733	1,021	1,325
Notes Payable	1,052	2,236	3,508
Current Liabilities	3,535	5,286	7,114
Long-Term Debt	13,477	22,804	33,463
Total Liabilities	17,012	28,090	40,577
Common Stock	15,000	21,000	27,000
Retained Earnings	1,553	2,685	4,567
Total Equity	16,553	23,685	31,567
Total Liabilities & Equity	33,565	51,775	72,144

Medical Technology Co. - Statement of Cash Flows 2015-2016
All figures in $1,000
		2015		2016
Cash Flows from Operations
Net Income		1,132		1,882
Adjustments to Reconcile NI to Cash
Depreciation		1,561		1,645
Increase in Accounts Receivable		(1,470)		(1,983)
Increase in Inventories		(2,413)		(2,435)
Increase in Pre-Paid Expenses		(323)		(177)
Increase in Accounts Payable		279		252
Increase in Accrued Taxes/Wages		288		304
Net Cash from Operating Activities		(947)		(511)
Cash Flows from Investing
Capital Expenditures (Net)		(14,266)		(16,227)
Depreciation Adjustment		(1,561)		(1,645)
Net Cash from Investing		(15,827)		(17,872)
Cash Flows from Financing
Increase in Notes Payable		1,184		1,272
Increase in Long-Term Debt		9,327		10,659
Increase in Common Stock		6,000		6,000
Net Cash from Financing		16,511		17,931
Net Change in Cash		(263)		(452)