Pacific Precision Financial Situation Essay Example | Topics and Well Written Essays - 750 words

Pacific Precision Financial Situation - Essay Example Pacific Precision's increasing NWC can be examined by looking at the components of this financial measure. Appendix 1 shows how this is computed for the years 2002-2004. What becomes apparent is the increase in days' sales outstanding and days' sales of inventory. The increase in days' sales outstanding indicates the inefficiency of the company in collecting its accounts receivable. Having its sales tied up in accounts receivable for a longer period means that it doesn't have adequate cash to cover its immediate obligations. Meanwhile, the increase in days' sales in inventory shows that Pacific Precision is not very efficient in moving its inventory into sales. This has negative implications-the company incurs holding cost of inventory and its current asset becomes bloated with less liquid resources. These two ratios simply imply that the company's inefficiency makes it less liquid and hindering it from paying its current creditors, and thus, a higher NWC. 2. 2. What is your assessment of Pacific Precision's profitability Keeping in mind that there are many ways to measure profitability (net income, ROS, ROE, ROA, EVA, etc.), what observations would you make about adequacy One of the ultimate measures of Pacific Precision's profitability is its computed return on equity (ROE). It should be noted that the main goal of a business organization is to maximize shareholder value which is, in turn, measured through the ROE. In order to gain an adequate assessment, the company's ROE must be benchmarked with the other players in the industry. Appendices 2 and 3 show the computed ROEs of Pacific Precision and its competitors from 2002-2004. It should be noted that Pacific Precision's ROE is in an uptrend during the period under consideration. During 2002, the company records a 12% ROE which mounts to 13.34% and 18.18% in 2003 and 2004, respectively. This becomes a good indication of the company's performance as it reflects its ability to enhance its profitability. However, in the benchmark analysis, it can be seen that the company is performing worse than its two competitors. In fact, Company #2 even manages to record an ROE of 20.7% during 2004. Even though Pacific Precision's profitability is improving, it should be noted that it lags behind other industry players. 3. It appears that Pacific is increasingly dependent on short-term debt. What is driving this use, and is it in your estimation a relatively minor or a serious issue for management Over the past years, Pacific Precision has been becoming overly dependent on short-term debt. One reason that the case states is the company's previous attraction to the low interest rates on yen short term loans. However, interest rates have increased making these short term debts escalates. The dependence on short term, debt can also be attributed to the company's inefficiency in managing its working capital. As stated