Chem Med Case
Problem Statement: Chem-Med Company is positioned strongly in its industry to achieve high growth and earn large profits in the future, but it is in need of financing. To secure this financing, Chem-Med must address concerns of potential financers and investors regarding liquidity, efficiency, cash flow, and the need for funding despite apparent growth. In addition, Chem-Med’s primary competitor, Pharmacia, is out-competing the company and stealing valuable market share and sales volume with lower prices. Analysis: To understand Chem-Med’s problems, we must first look at the company’s liquidity and efficiency through the calculation of various ratios. Common measures of liquidity, activity, and profitability for ChemMed and its competitor Pharmacia can be found in the following table:
Chem-Med Pharmacia 2.9 2.8 1.08 5.8 30.15% 7.00% 13.67% 55.00% 29.66% 29.56% 0.8493 1.9
Current Ratio Inventory Turnover Net Profit Margin Debt-to-Assets Return on Equity Total Asset Turnover
Chem-Med is competitive with Pharmacia in terms of Current Ratio and Return on Equity. But Chem-Med turns over inventory much slower than Pharmacia, at 1.08 times per year versus Pharmacia’s 5.8 times. Chem-Med also utilizes assets more poorly, generating sales equal to only .8493 times total assets compared to Pharmacia’s 1.9 times.
It is interesting to note that Chem-Med has a much higher profit margin than Pharmacia while maintaining virtually the same Return on Equity. To understand this phenomenon, we must deconstruct each firm’s Return on Equity (ROE) using the DuPont Method. ROE Chem-Med Pharmacia We can see that Pharmacia makes up for its lower profit margin with a much higher total asset turnover as well as a better use of debt to achieve a return on equity similar to that of Chem-Med. While ChemMed operates with a much higher profit margin than Pharmacia, its utilization of assets and debt falls far below the standards of its competitor, causing the firm problems. Chem-Med has
Chem-Med Pharmacia 2.9 2.8 1.08 5.8 30.15% 7.00% 13.67% 55.00% 29.66% 29.56% 0.8493 1.9
Current Ratio Inventory Turnover Net Profit Margin Debt-to-Assets Return on Equity Total Asset Turnover
Chem-Med is competitive with Pharmacia in terms of Current Ratio and Return on Equity. But Chem-Med turns over inventory much slower than Pharmacia, at 1.08 times per year versus Pharmacia’s 5.8 times. Chem-Med also utilizes assets more poorly, generating sales equal to only .8493 times total assets compared to Pharmacia’s 1.9 times.
It is interesting to note that Chem-Med has a much higher profit margin than Pharmacia while maintaining virtually the same Return on Equity. To understand this phenomenon, we must deconstruct each firm’s Return on Equity (ROE) using the DuPont Method. ROE Chem-Med Pharmacia We can see that Pharmacia makes up for its lower profit margin with a much higher total asset turnover as well as a better use of debt to achieve a return on equity similar to that of Chem-Med. While ChemMed operates with a much higher profit margin than Pharmacia, its utilization of assets and debt falls far below the standards of its competitor, causing the firm problems. Chem-Med has