Alicia Wilkinson_FIN320_Module 4 Case Study

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Alicia Wilkinson FIN 320: Principles of Finance Southern New Hampshire University November 19, 2021 Assessing a Company’s Future Financial Health Systematic risk is a type of risk that is related to the market as a whole, while unsystematic risk is a type of risk that is isolated to an industry or company. (Chen, 2021) Though the two appear similar, their biggest difference is their ability to control each type of risk. A systematic risk is unpredictable, unavoidable and does not allow modification with diversification. An unsystematic risk is predictable, has the potential to be avoidable with a diverse portfolio to deflect the unfavorable affects. Financial risks are a necessity for companies, allowing them to create a diverse portfolio that will encourage financial growth. In the case study, the company faces various financial risks such as: interest rate risk, economic risk, credit risk, and operational risk. Assessment of each of these risks will provide a true assessment of the company’s financial state. Interest rate risk is the potential of loss of investments due to changes in interest rates. (Chen, 2021) This type of risk is most common with assets that are financed like real estate; as the market fluctuates, companies could be adversely affected by the changes in market rate. According to SciTronics balance sheet and financial ratios, it appears that about half of their assets are interest bearing assets. Economic risk is, “when a company’s market value is continuously impacted by an unavoidable exposure to currency fluctuations.” (Ganti, 2021) These could be changes in government policy or changes in local market rates. Since SciTronic is a medical device company, it has a chance of

being impacted by economic risk. With the recent influx globally for medical needs, there are likely new and changing policies that impact this type of company. Credit risk is the potential of losing money that results from failure to repay a loan or meet the terms of a contract. (Team, T.I., 2021) Per SciTronic’s balance sheet, the company has credit debt which means they have credit risk. Additionally, it appears that SciTronic has a fair amount of liquidity sot their debt-to-asset ratio is not too concerning. Operational risk is, “the uncertainties and hazards a company faces when it attempts to do its day-to-day business activities within a given field or industry.” (Segal, 2021) Without more information , it is hard to tell whether or not SciTronics is inevitably at risk . O perational risk is inherent to business operations and should always be considered when making important business decisions regarding finances, company policies, and when developing the company’s vision. A lower growth in sales could potentially defer future plans for the company. If they were to base some sort of new growth or expansion off of the most recent years change in income and growth in sales, that effort may be stunted by a smaller growth in sales. The effect would be opposite with a larger growth in sales, as there would be even more additional funds to put towards growth and new projects. However, a larger growth in funds may also lead to false security in regard to sales could lead the company to overextend beyond their financial reach. Per the case study, if SciTronic reduced its sales growth by 5% they would be able to eliminate their need for external finance. If a company was stretched too thin regarding their dividend policy, they run the risk of having to cut dividends or sacrifice additional retained earnings to maintain the dividend schedule. This could be detrimental to the financial health of the company. Dividends and

retained earnings reflect sales and are a good indicator of current and future performance but making unnecessary risky predictions could be costly for the company, investors and stockholders.

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References Chen, J. (2021, November 19). Interest rate risk definition . Investopedia. Retrieved November 21, 2021, from https://www.investopedia.com/terms/i/interestraterisk.asp. Chen, J. (2021, November 20). What is systematic risk? Investopedia. Retrieved November 21, 2021, from https://www.investopedia.com/terms/s/systematicrisk.asp#:~:text=Systematic %20risk%20refers%20to%20the,a%20particular%20stock%20or%20industry. Ganti, A. (2021, November 20). Foreign Exchange Risk Definition . Investopedia. Retrieved November 21, 2021, from https://www.investopedia.com/terms/f/foreignexchangerisk.asp. Segal, T. (2021, November 20). Reading into operational risk . Investopedia. Retrieved November 21, 2021, from https://www.investopedia.com/terms/o/operational_risk.asp. Team, T. I. (2021, November 20). What is credit risk? Investopedia. Retrieved November 21, 2021, from https://www.investopedia.com/terms/c/creditrisk.asp.