Introduction
ITE X Corporation is a company incorporated in the US and focuses in provision of a wide range of technological solutions for medical, aerospace and consumer markets. I have chosen the company for analysis based on my interest in developments in technological solution providers. The following is an analysis of ITEX financial performance and position for year 2012.
Total assets
The company’s assets as at 31 July 2012 amounted to $13.11 million being a significant decline in year 2011 where the assets totaled $17.02 million. Having a huge asset base is imperative in generation of sales. A reduction in value of asset base for the company is therefore worrying as it indicates deterioration in earning capacity. Management should therefore put in place measures aimed at growing the size of the business assets so as to boost its earnings.
Cash and cash equivalents
The company’s cash and cash equivalents amounted to $1.94 million as at the end of financial year 2012 compared to $5.39 million in year 2011. Decrease in cash balances is indicative of deterioration in liquidity. The company has therefore performed poorly in maintaining its ability to meet its short term obligations.
Accounts payable
The company recorded a marginal increase in accounts payable from $0.08 million in year 2011 to $0.09 million in year 2012. This indicates delayed payments to suppliers which could help boost cash flows though at the same time might make suppliers hesitant to offer trade credit in future. A balance should therefore be maintained between lagging payments to suppliers to improve cash flows and settling such dues within the credit period offered so as to take advantage of any cash discounts which might be offered.
Revenues
The company has been recording a fall in revenue for the last three years. Revenues fell from $16.93 million in financial year 2010 to $16.42 million in year 2011 representing a 3 percent drop. A further decline in revenues to $15.79 million was reported in year 2012 being a 4 percent drop. The company has therefore recorded a consistent drop in market share.
Change in net income
Net income for the year 2012 increased by $270,000 from $700,000 in year 2011 to $970,000 in financial year 2012. Despite the poor revenue trends as noted above, ITE managed to reduce its costs thus boosting its net income albeit marginally.
Total current assets
Total current assets as at 31 July 2012 amounted to $3.76 million which was a significant drop from $7.38 million in the previous year since it was a 49 percent decrease in current assets. Reduction in working capital is an indicator of poor financial position for a company.
Importance of the information to users of financial information
There are a number of users of financial information such as management, employees, regulatory agencies, potential and existing investors as well as suppliers. The following is a review of the importance of the information above to the various users of financial information.
Management of an organization is interested in the performance of an organization in terms of profitability and efficiency. They are also concerned about the financial position of an entity. Total asset of the company was on a declining trend which would concern management. This is because assets are useful in generation of earnings and thus failure to increase or at least maintain assets would lead to deterioration of earning capacity of an entity. Cash and cash equivalents are important in the operations of a business and thus the significant deterioration in cash balances should be a key concern to management. Management of suppliers is also important to managers and thus the level of accounts payable would provide information useful for decision making. The reduction in revenues noted earlier would also interest management since this is red flag that all is not well in the company. A marginal improvement in net income was noted during the year which is an indicator of positive improvement in results. Management should study the movement in net income for areas where further improvement could be achieved. Management would also be interested in information regarding current assets. The decrease in current assets is an indicative of the poor financial position of the company where attention by management would be required.
Employees would be mainly interested in financial performance of a company in terms of net income. Significant increase in net income could be a reflection of improved fortunes for the company and thus a basis for negotiating for better terms of service for employees. Changes in financial position of an entity such as deterioration of earnings and revenues, decline in asset base or increase in liabilities could also be of importance to employees. This is because such information could help employees assess the liquidity and solvency and thus provide basis for assessing one’s job security.
Regulatory agencies such as tax agencies would be interested in net income for the year so as to assess tax liability for a company. Stock market regulators on the other hand would watch movement in asset base for listed companies as a basis for assessing their financial risk. Level of current assets and cash balances is critical in determination of liquidity risks and thus useful to regulators as such as stock market watchdogs for instance the Security Exchange Commission (SEC). Information regarding revenues, net income, current assets, and total assets would therefore be very useful to various regulators. Deterioration in current assets and total assets is a key concern in relation to this entity.
There are existing or potential investors whose main contribution is financial injection in an organization. Net income earned is usually a concern for this group since for existing investors; it would be an indicator of the value generated by their investment. On the other hand, net income indicates the potential returns for a company and thus a useful input in assessing whether to invest in an entity.
Suppliers make use of financial statements in designing its credit policy as well in assessing credit worthiness of a business. The deterioration in net income would be a concern to suppliers as well as the significant decline in cash and cash equivalents. It is imperative to note that based on movement in trade payables, the company has opted to delay payments. Whereas increase in level of trade payables lead to improvement in working capital, it could cause suppliers to withhold credit services.
Conclusion
ITE recorded significant deterioration in financial position as noted from the huge decrease in total assets, current assets and the significant reduction in amounts of cash and cash equivalents. Market share for the company also declined as noted from the decrease in revenues. Management however managed to at least maintain the company’s net income.