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Sirtex Medical Healthcare: Profitability Analysis

3701 words (15 pages) Essay in Finance

08/02/20 Finance Reference this

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Abstract

This research report revolves around the probability of “Sirtex” being a profitable investment opportunity for a foreign investor who is scanning profitable industries in Australia for profitability purposes. The interest in Sirtex is developed because it is considered to be among Australia’s top group in the healthcare industry. For this purpose, a group of analysts were offered to conduct this very analysis.

Key points that made it to the summary of this research must also be discussed a little. First and foremost, the company’s going concern is guaranteed with its cash flow statement showing all the positive figures. Second point, however, highlights lack of risk management practices in the group which may attract huge losses. Third key point that needs attention is the lack of usage of resources at full or optimum capacity by the group as well as non-utilization of its assets to generate appropriate amount of profits. These are not just allegations since all of the aforementioned points can be observed in the annual report of 2017 of Sirtex.

Table of Contents

Sirtex Medical

I.                    Introduction

A group of analysts have conducted this research in order to provide key financial information like profitability, going concern, and operational efficiency regarding one of Australia’s leading healthcare group “Sirtex” to a potential overseas investor.

Sirtex is qualified to get analyzed for profitability since our overseas investor is only interested in the top players in the Australian healthcare industry. This report revolves around both financial and non-financial aspect of the firm by means of in-depth analysis of the 3 years annual report of the company.

The detailed analysis of the firm regarding its financial and non-financial status starts with the introduction of corporation. Further working on the ratio analysis for the company helped the group of analysts to provide a well-informed decision for the overseas investor about this Australian health care group. Later on, cash management activities by the firm and its impact on the investor’s money was discussed. Cash flow activities of this corporation showed favorable opportunities for the investor based on the in-depth analysis of annual reports of the company. However, there are some areas that also showed unfavorable opportunity for the investor. Areas like risk management practices as well as its dividend related policies that took a downfall starting from 2018 making the company suffer huge losses which further made the company less favorable to invest in. Another reason for those huge losses were lack of practices related to asset utilization at full or optimum capacity. Updated infrastructure and information systems adoption may bring hope for the betterment of the company since both the weakness can be dealt with if negligence related to human resource training, risk management and proper asset utilization is taken care of. For 2018, the going concern concept for this firm is very much unfavorable (Luther& Pan, 2015).

II.                  Financial Analysis of Sirtex:

2.1 Description of the company:

Sirtex is Australia’s leading healthcare brand that was listed on ASX till 2017. The company recently got delisted due it suffering of huge losses and paying off the dividends even though the losses were huge because of poor risk management. Apart from that, the firm is a rapidly growing, profitable, global life-sciences business focused on helping medical professionals improve clinical outcomes for cancer patients through innovative and effective interventional oncology therapies. Our current main product is a targeted radiation therapy for liver cancer called SIR-Spheres microspheres.

We currently employ more than 250 people worldwide in a range of management, administration, clinical research, medical marketing, sales and manufacturing roles. Our corporate head office is based in Sydney, Australia with regional headquarters in Boston USA, Bonn, Germany and Singapore. Together the team at the firm is challenging established practices and introducing innovative new therapies that promise to improve the lives of people around the world facing the challenges of cancer (Holley et al., 2016).

Furthermore, the company is enjoying the competitive advantages across sales, marketing, regulatory and reimbursement that could add value to any acquisition (Sirtex, Australia). The firm continued making progress in their strategy to guarantee the treatment of huge number of patients with their product. Firm also prolonged their Global Pricing, Reimbursement and Market Access team during the year, highlighting their commitment towards driving reimbursement expansion across their niche’, with a focus on EMEA and APAC (Holley et al., 2016).

2.2 Calculation and Analysis of Selected Ratios:

Here we shall discuss Sirtex feasibility by calculating and comparing ratios related to profitability and efficiency of operations over past three years. This will provide a base to further analyze the trend and a well-informed result may be deducted after this analysis.

Profitability Ratios:

Below is the much-needed data in order to measure ratios:

 

2015 $000

2016 $000

2017 $000

Cost of Goods Sold

27,700

35,287

36,177

Equity

144,636

193,504

149,467

Net Profit/Loss

40,345

53,582

-26,257

Sales

176,088

232,492

234,282

Total Assets

201,476

261,717

194,122

(Sirtex Annual Reports – 2015 to 2017)

 

Calculations:

 

Profitability Ratios:

Return on Equity

Net Profit Margin

Return on Assets

Gross Profit Margin

Formulas

Net Profit / Equity* 100

Net Profit/sales

Net Profit /Total Assets* 100

Sales – Cost of sales/ Sales

2015

27.9%

22.9%

20.0%

84.3%

2016

27.7%

23.0%

20.5%

84.8%

2017

-17.6%

-11.2%

-13.5%

84.6%

 

 

Trend Analysis and findings on Profitability Ratios:

In order to calculate probability ratios for any company, one of the most advanced and powerful tools is by far Trend Analysis (Sen, Zu 2011). In addition to that, a year’s worth of profit or loss fails to provide the real position of the company. Hence, use of trend analysis allows to compare the findings of multiple years and derive a well-informed conclusion that is based on facts and findings and not just a hunch. The trend of the company for the last three years can be observed with the aforementioned data. Different elements of chart of accounts were taken into consideration in order to make the use of profitability ratios fruitful. Elements included were Assets, Total Equity, Revenue, etc. After the computation we can say the company profit margin is not positive past two years were not the best of the year of the firm specially in 2016, only 0.1% growth in that year and later on if dropped to -11.2%. As for return on equity, it also started to drop to 27.7% in 2016 while the next year, it crashed to -17.6% that is way less than the industry. The gross profit margin of the company increased in 2016 by 0.5% but next year it dropped to 84.6%. This shows the low retention of profits by the firm. Return on assets raised by 0.5% in 2016 but dropped to -13.5% in 2017 (Holley et al., 2016). 

Moreover, the company suffered huge loss in 2017. The loss forced all of the ratios to predict a negative result. Excess of expenses over revenue made the company suffer huge loss. However, the company is working on its Vision 2020 strategy to improve its strong suits as well as eliminating all the negative sides by adopting technological advancements and training of employees to improve the asset utilization capability of the company. The profitability factor of any company is the most common deciding factor for investors to made investments.

.

Operating and Efficiency Ratios:

Data to Calculate Ratios:

2015 $000

2016 $000

2017 $000

Total Assets

201,476

261,717

194,122

Sales

176,088

232,492

234,282

Account Receivable

35,000

42,272

36,976

(Sirtex Annual Reports – 2015 to 2017)

Calculations:

Operating Ratios

Asset Turnover

A/R Turnover

Formulas

Net Sales/Total Assets

Net Sales/Account Receivables

2015

0.874

5.031

2016

0.888

5.500

2017

1.207

6.336

Trend Analysis and findings on Operating Efficiency Ratios:

In the calculations above, we saw a gradual increase in Sirtex Asset Turnover with an increase of 0.014 in 2016 to increase of 0.319 in the year 2017. A look at Accounts Receivable Turnover highlights the gradual increase in A/R Turnover over the last 3 years. Jumping from 5.031 to 5.5 in the year 2016. And from 5.5 to a whopping 6.336 in the year 2017. The higher figures of receivable may create a hope at first look but it’s presence in the balance sheet increases the current asset which do not represent the real picture of the company’s financial position. In case of liquidation, if those huge figures of receivables go uncollectable, the investor may find himself stuck in a losing situation (Luther& Pan, 2015).

2.3 Cash Management Analysis:

Knowledge of a company’s cash management strengthens the idea of having a safe investment in the company since it sometimes considers to be the backbone in having profitability in the company. Salas-Molina et al, (2019)

Management of cash plays a vital role in company’s operations since any changes in the value of money or cash reserves may cause seizure of company’s operations all together.

Sirtex is having $21,025,000 in 2016 and $50,349,000 in 2017 in cash and cash equivalents. Cash is usually managed by investing in short term investing products. These products are also called Marketable securities. These highly liquid in nature marketable sits in the current asset side of the balance sheet and in case of Sirtex, it’s labeled as “Other Short-Term Deposits”. Use of these short-term deposits brings income in the form of interest to serve as insurance against any losses regarding any deficiency in currency exchange rate or time value of money. Having idle money is less favorable as compared to having your cash invested in easily convertible shares. (Soyeh & Wiley, 2019).

A look at 3 years of balance sheet tells us that Sirtex started investing their cash in short term deposits to earn interest income in the year 2016. This habit was left by the company since the value of “Other Short-Term Deposits” dropped significantly in the year 2017.

 

2.3 Sensitivity Analysis:

To start with sensitivity analysis, first we need to calculate the Net Present Value.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Calculations:

Sensitivity analysis informs us about the ambiguity in the result of any budgeted goals of an organization that can be separated and assigned to different sources of ambiguity in its ideas.

Variable Cost per Unit Increase by 10%

Increases by 10% and the price is now $13.2. The change in NPV is from $2,758,223 to $2,032,035 remaining all other factors same.

Unit Sales Decrease by 10%

Decreases by 10% in unit sales will get the result in amount of $270,000. Net Present Value would also be changed from $2,758,223 to $2,274,098 remaining all other factors same.

Price per Unit Decrease by 10%

Decreases by 10% in price per single unit that would make a new price of $18. The change in NPV is from $2,758,223 to $1,547,910 remaining all other factors same.

Cash Fixed Cost Increase by 10%

Increases by 10% in cash fixed cost would set the new price of $330,000. The change in NPV is from $2,758,223 to $2,697,707 remaining all other factors same.

 

Sensitivity analysis highlights the possible scenarios that can cause the change in value for both favorable and unfavorable side. This ability makes it good at predicting future performance of any company.

2.4 Systematic and Un-Systematic Risk

A company’s health and performance in both short and long term are linked to its microeconomic and macroeconomic events. These events are related with the risks that may be Systemic and un-systemic in nature. Any risk that cannot be avoided at any cost must be labeled as Systemic risk while any avoidable risk that the top management of the company may steer to meet its goal would be regarded as Un-Systemic risk. Sirtex may be a great cushion during times of economic downturns due to its low beta and low fixed cost. However, in addition to this, recommendations are made to take into account its fundamentals as well before jumping into the investment. Since the company has poor risk management practices and lack of training in terms of optimum capacity utilization of its assets, these risks may be coined as Systemic Risk. Any change in the value of money by means of change in exchange rate not only effect the value of debts loaned by the company but will also affect the profit/loss of the company which would further touch the value of dividend. Such risk may become a part of un-systemic Risk. Company’s reliance on loans would also harm the company in case of any increase in interest rates by the banks. This would increase the cost of production which would reduce the sales revenue further. Such risks are both systemic and un-systemic since avoidance of debt reliance can be made but seizure of change in interest rates cannot be taken care of.

Reduction in Research and Development expenses may also cause risk for the firm since its product is slave to technological advancements (Holley et al., 2016).

2.5 Dividend Payout Ratio and Dividend policy discussion:

Sirtex Dividend Payout Ratio was 32% in 2016. This was reduced to negative value since the company suffered huge losses in 2017. However, this firm was able to pay the dividend since appropriate policies regarding dividends were adopted. Retained Earnings were decreased in order to pay out the dividends in 2017. The dividend payout ratio, however, in 2016 was 32%, which increases to 36% in 2017. Any negative change in the payout ratios related to dividends results in weak position of the company in the stock market.

 The firm adopted the policy for dividend payouts where the company has to annually distribute some figure of dividend. If the company did not make any profit in the current year, the dividend must be payed out of the retained earnings. Also, the company adopted a harmful and increasing way of increased dividend payout even in the events of losses which resulted in gradual decrease in the Retained Earnings of the company over the past three years (Robinson et al., 2015).

III.                Letter of Recommendation:

After careful analysis of the three years of annual reports of Sirtex Medical Limited, we, the group of analysts, have come to the deduction that investing in the company is in not suitable to invest in by our overseas investor. This decision was taken based on the extensive research and analysis we did on the company using their profitability ratios as well as operation efficiency ratios for the current year and the last two years. The company have more weak points as compared to strong points that’s it not beneficial for investment. Those weak points include, but not limited to, lack of risk management practices that have harmed the company’s operations in both the short and long run. So much so, that it become delisted from Australian Stock Exchange in the year 2018. Thus, no annual report for the year 2018 was found. Also, the company lacked professional competence when it comes to assets utilization since for past three years, all the firm’s assets were remained under-utilized. Any major microeconomics or macroeconomic crisis would have taken down the company in no time making its shareholders possess a zero-value stock in their hands. Although the company has stated their vision2020 strategy to have a comeback in the industry, we are still unsure if their dream would come to reality. Based on aforementioned reasons, facts, and figures, we can would advise our overseas client not to put his money since the company is doing bad in two major areas of business that are responsible for a business to be a going concern. First, risk management, second, capacity utilization of assets. Any investor would look for an uptrend when it comes to profitability but if we talk about this firm, it was a downtrend which disqualifies it to be a part of recommended shares list. Investment in any other company in the same industry is advised after careful and in-depth analysis of company’s past data.

IV.               Conclusion:

Concluding this report, we would like to propose some remedial measures to be taken by Sirtex Medical Limited. One of them is hiring experienced and industry standard risk managers to take care of risk policies related to cash and other business operations. Also, we would like to suggest hiring qualified cost and management accountants to devise cost reduction techniques as well as making the company utilize its asset at full capacity for increased profits. Also, investing in training the employees would come fruitful in the long run. Another, important factor that needs to be avoided is too much reliance on bank loans to run the company’s operations. This would attract unavoidable risks which would later harm the company’s dividend payout policy.

References

  • Holley, J., Chambers, M., & Gillard, S. (2016). The impact of risk management practice upon the implementation of recovery-oriented care in community mental health services: a qualitative investigation. Journal of Mental Health, 25(4), 315-322.
  • Luther, R., & Pan, Y. (2015, June). Effect of Massachusetts healthcare reform on financial performance of healthcare providers: Panel data analysis. In 2015 12th International Conference on Service Systems and Service Management (ICSSSM) (pp. 1-5). IEEE.
  • Robinson, T. R., Henry, E., Pirie, W. L., & Broihahn, M. A. (2015). International financial statement analysis. John Wiley & Sons.
  • Sirtex Australia (SA). Sirtex Medical Retrieved From: https://www.sirtex.com/au/
  • Wager, K. A., Lee, F. W., & Glaser, J. P. (2017). Health care information systems: a practical approach for health care management. John Wiley & Sons.
  • Xiong, F., Chapple, L., Xu, S., & Lin, W. (2019). Adoption and use of technology with low litigation risk–the case of financial reporting on Twitter by ASX companies. Technology Analysis & Strategic Management, 1-19.
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