Dr. Swans primary problem was that although he was convinced the company was sound and would grow, he wasnt sure how to communicate that to potential investors in the financial community in a way that would convince them. Just handing out past income statements and balance sheets (shown in Tables 1 and 2) that he received from the accountants didnt seem to be enough. Further, he wasnt even sure the company needed outside financing, let alone how much. He just believed they would need it, since they had always had to ask for money in the past.

CHEM-MED COMPANY
Income Statements
	20XU20XW (in thousands)			Pro Forma Income Statements
	20XU	20XV	20XW	20XX	20XY	20XZ
Net sales (all credit)............................	$ 777	$3,051	$3,814	$5,340	$7,475	$10,366
Cost of goods sold..............................	257	995	1,040	1,716	2,154	2,954
Gross profit........................................	520	2,056	2,774	3,624	5,321	7,412
Selling, etc., expenses.........................	610	705	964	1,520	2,120	2,645
Other income (expenses)*...................	0	0	0	500	0	0
Operating profit...................................	(90)	1,351	1,810	2,604	3,201	4,767
Interest expense....................................	11	75	94	202	302	434
Income before tax................................	(101)	1,276	1,716	2,402	2,899	4,333
Income taxes........................................
(40% in 20XV; 33% thereafter).......	0	510	566	793	957	1,430
Net income..........................................	($ 101)	$ 766	$1,150	$1,609	$1,942	$ 2,903
Dividends paid....................................	0	0	0	0	0	0
Increase in retained earnings.............	$ (101)	$ 766	$1,150	$1,609	$1,942	$ 2,903
Average number of shares**...............	2,326	2,326	2,347	2,347	2,347	2,347
Earnings per share..............................	($0.04)	$0.33	$0.49	$0.69	$0.83	$1.24
*Other income (expenses) refers to extraordinary gains and losses. In 20XX, $500,000 is expected from Pharmacia Inc., in settlement of the lawsuit. **Shares are not publicly traded.
TABLE 1

CHEM-MED COMPANY
Balance Sheets (in thousands)
				Pro Forma Balance Sheets as of Dec. 31, years ended:
	20XU	20XV	20XW	20XX	20XY	20XZ
Assets
Cash and equivalent.....................................	$ 124	$ 103	$ 167	$ 205	$ 422	$ 101
Accounts receivable.....................................	100	409	564	907	1,495	2,351
Inventories.......................................................	151	302	960	1,102	1,443	798
Other current..................................................	28	59	29	41	57	11
Total current assets................................	403	873	1,720	2,255	3,417	3,261
Property, plant, & equipment......................	1,901	2,298	2,917	4,301	5,531	8,923
Less: Accumulated amortization.........	81	82	346	413	522	588
Property, plant, & equipment net..............	1,820	2,216	2,571	3,888	5,009	8,335
Other capital assets......................................	0	101	200	200	215	399
Total assets.....................................................	$2,223	$3,190	$4,491	$6,343	$8,641	$11,995
Liabilities
Accounts payable.........................................	$210	$ 405	$ 551	$771	$1,080	$ 1,512
Short-term debt.............................................	35	39	42	59	82	135
Total current liabilities.............................	245	444	593	830	1,162	1,647
Long-term debt..............................................	17	19	21	27	50	17
Total liabilities...........................................	262	463	614	857	1,212	1,664
Equity
Common stock..............................................	2,062	2,062	2,062	2,062	2,062	2,062
Retained earnings.........................................	(101)	665	1,815	3,424	5,366	8,269
Total equity................................................	1,961	2,727	3,877	5,486	7,428	10,331
Total liabilities and equity............................	$2,223	$3,190	$4,491	$6,343	$8,640	$11,995
TABLE 2

Dr. Swan had lunch with his banker recently, and the banker mentioned several restrictive covenants the company would have to meet if it came to the bank for financing. The three covenants were

The current ratio must be maintained above 2.25 to 1.

The debttoassets ratio must be less than 0.3 to 1.

Dividends cannot be paid unless earnings are positive.

Dr. Swan didnt think he would have any trouble with those, but he wasnt sure. He would have to analyze the numbers before the next board of directors meeting, but he now had to meet with a representative of a supermarket chain.

As a financial advisor you are considering the addition of ChemMed to your clients portfolio, you are interested in the companys record of profitability, prospects for the future, degree of risk, and how it compares with others in the industry (shown in Table 3). From that point of view, write a report to your client addressing the following questions:

	Biotechnology Industry StatisticsMedian Company in Biological Products
	20XU	20XV	20XW
Current ratio..................................	2.5	2.3	2.4
Quick ratio.....................................	1.2	1.1	1.3
Inventory turnover.........................	5.5	5.6	5.7
Total asset turnover........................	1.15	1.16	1.18
Return on sales..............................	4.00%	4.00%	5.00%
Return on assets..............................	4.60%	4.64%	5.90%
Return on equity............................	7.64%	8.44%	12.29%
Total debt to assets.........................	0.40	0.45	0.52
	Selected Statistics, Pharmacia Company
	20XU	20XV	20XW
Current ratio...................................	2.8	2.7	2.8
Quick ratio.....................................	1.5	1.3	1.6
Inventory turnover..........................	5.6	5.7	5.8
Total asset turnover.........................	1.9	2	1.9
Return on sales..............................	6.00%	6.50%	7.00%
Return on assets..............................	11.40%	13.00%	13.30%
Return on equity............................	19.04%	27.66%	29.56%
Total debt to assets........................	0.40	0.53	0.55
Price-earnings ratio.........................	13.7	14	15
Average share price.......................	$21.78	$24.92	$31.50
TABLE 3

c. What is the companys rate of net income growth in 20XX, 20XY, and 20XZ? Is projected net income growing faster or slower than projected sales? After computing these values, take a hard look at the 20XX income statement data to see if you want to make any adjustments.

d. How does ChemMeds current ratio for 20XW compare to Pharmacias? How does it compare to the industry average? Compute ChemMeds current ratio for 20XZ. Is there any problem with it?