Executive Summary
This paper demonstrates the use of real financial data in financial analysis in decision making for potential investors. This analysis attempts to reflect on the financial analysis with the aim of making an informed deduction on the nature, structure, and form of capital capacity, operative profitability, and investor confidence. The Unilens Vision Incorporation operates in the health care sector within medical equipment and devises industry. Established in the year 1989, the incorporation has been active in the design and production of specialty and soft contact lenses products that are distributed primarily through the incorporation owned and independent retailers across Canada, the US, and Western Europe. The main competitors are Akers Biosciences Incorporation, BioLife Solutions Incorporation, Mela Sciences Incorporation, NeuroMetrix Incorporation, Pro-Dex Incorporation, Nephros Incorporation, and Skyline Medical Incorporation among others. Despite the fact that the performance of the entity declined during the period, it can be observed that the efficiency ratios improved. Thus, there is a high potential for the company to grow in the future if the current trend of efficiency persists.
Introduction
Objective
The objective of this paper is to carry out a broad financial analysis for the Unilens Vision Incorporation. It explores the various techniques and tools used for financial analysis. The study is based on comparative analysis of historical data on financial performance of the Unilens Vision Incorporation. The study concentrates on statistical highlights of this corporation’s ratio analysis and their relationship to financing. In addition, percentages are used in the analysis to monitor changes over time. Graphs are also used to portray trend of various variables in the study over the period of analysis. The analysis is focused on analysis of financial statements of the company.
Summary of findings
Apparently, the Unilens Vision Incorporation experienced decline in the liquidity ratios from 1.52 in 2010 to 1.12 in the year 2014. Besides, the interest coverage ratio decreased from 19.84 in the year 2010 to 8.3 in the year 2014. The company recorded a decline in total assets from $4,467,338 in 2010 to $3,855,906 in the year 2014. The value of equity was also negative through the five years. This shows that the solvency of the company deteriorated over the period of the study.
Industry and Environment: The Medical Equipment and Devises Industry
Industry Characteristics
The Unilens Vision Incorporation operates in the health care sector within medical equipment and devises industry. Specifically, the incorporation offers a variety of lenses. Over the past decade, the industry has registered steady growth and the same trend is expected in the future. The key players in this industry include medical products and services suppliers, medical institutions, and healthcare providers. Thus, the current economic feasibility positioning largely depends on the primary drivers of the industry.
Sales Characteristics
In the recent past, the industry has experienced increase in sales and revenue. This was as a result of the expansion and opening of new businesses. The increase in sales was influenced by improvement of services and establishment of new market niche in the specialty lenses. The net sales decreased by 0.87% from the year 2010 to the year 2014, with series of fluctuations in the value during the period.
Sources and Uses of Funds
The sources of funding for this incorporation are debt funding and funds from shareholders. In addition, the incorporation resorts to other short-term financing plans such as expansion loans. The production, administration, and distribution channels take the largest part of the funds. In addition, the incorporation does allocate funds for advertisement and research as a strategy meant to improve on quality of their services.
Causes of Changes in Industry Prospects
The medical equipment and devises industry is expected to grow rapidly in the future as demand for low cost medical equipment expands. Therefore, the incorporation is expected to further expand its revenues and sales due to the newly created market for green affordable soft contact lenses in its line of production. Specifically, the demand for low cost soft contact lenses in America and Western Europe will be a major survival point of the incorporation, which has spread its areas of operation to capture the wants of customers in this segment.
Unilens Vision Incorporation
Background and History
The Unilens Vision Incorporation was founded in 1989. The incorporation has its headquarters in Toronto, Canada and operates as a subsidiary unit of the Unilens Corp in Florida. The incorporation has been active in the design and production of specialty and soft contact lenses products that are distributed primarily through the incorporation owned and independent retailers across Canada, the US, and Western Europe. The incorporation is the leading in specialty and soft contact lenses.
Organization of Management
The executive management of the Unilens Vision Incorporation is made up of five senior personnel. The total number of employees of the Unilens Vision Incorporation is more than a thousand. All the employees of the incorporation work in the departments of production, marketing, and research. This team offers services in consultation, service delivery, and testing services. Indicated below is the list of the top management team at the Unilens Vision Incorporation.
Products
The incorporation has series of products and services such as Specialty and soft contact lenses. The most iconic and easy selling products in the Unilens Vision Incorporation are soft contact lenses.
Market and Distribution Channels
The incorporation sells its products both in the states market and across the world. The foreign markets include Western Europe, Japan, Latin America, and Mexico among others. The largest share of net sales emanates from the US market. This is followed by sales in Western Europe. The largest users of the incorporation products are individual customers and incorporations in the healthcare industry. The incorporation is divided into three segments with each segment operating independently, but is simultaneous to one another. In addition, marketing is mainly controlled by a series of recommendations from their customers. The only marketing risks that the incorporation faces are exchange rate fluctuations in the international markets, change of customer preferences, and reduced demand as a result of economic fluctuations and barriers to trade (Unilens Vision Inc par. 6).
Competition
The medical equipment and devises industry in which the Unilens Vision Incorporation operates in is characterized by stiff competition. The main competitors are companies that produce specialized and soft contact lenses. These companies include Akers Biosciences Incorporation, BioLife Solutions Incorporation, Mela Sciences Incorporation, NeuroMetrix Incorporation, Pro-Dex Incorporation, Nephros Incorporation, and Skyline Medical Incorporation. However, the Unilens Vision Incorporation has a greater competitive advantage than its competitors because it offers high quality products at a very competitive price. In addition, the incorporation’s dynamic supply chain management system has ensured reliability in product delivery and response to customer demands.
Production Facilities
The main production facilities of the Unilens Vision Incorporation are based in Toronto and Florida. In addition, the incorporation has made use of independent suppliers based in foreign countries such as Japan and Western Europe to expand into new markets. Reflectively, these manufacturing plants are strategically located across the market in the US to ensure that each unit cost of production results into maximum gain. However, despite these expansionary and strategic market positioning policies, the incorporation has continued to face unpredictability in the market response, especially in international markets that have penetration barriers and volatile currency (Unilens Vision Inc par. 4).
Promotional Activities
Since its establishment in 1989, the incorporation has spent millions of dollars in the research services department aimed at the creation of modern facilities in line with customer preferences. Through investment in new lens technology, the incorporation has been able to design Specialty and soft contact lenses. Moreover, the incorporation spent substantial amounts of money in the advertisement and other promotional campaigns.
Acquisitions
The initial Unilens Vision Incorporation was founded in 1965. Since then, the incorporation has been able to establish three independent business activities. These subsidiaries offer support services to each other. As a result of this acquisition, the incorporation acquired 9 locations of retail operation and all the trade marks. Reflectively, it is apparent that the Unilens Vision Incorporation has expanded its scope of operations through a series of acquisitions, rebranding and adaptation of expansionary business policies. Through acquisitions, the company has been able to diversify its products. From the above analysis of the Unilens Vision Incorporation, it is apparent that acquisition strategy has enabled the corporation to strengthen its market position.
Key Success Factors within the External Environment
Strong brand
The Unilens Vision Incorporation has established a brand image that enables it to attract customers with less effort as opposed to most of its less established rivals. The entrants have to invest heavily in promotion and advertising for them to attract new customers and maintain their customers. The established brand image has enabled the company to cut on its cost and get increased levels of profitability.
A steady commitment to quality
Strong commitment to quality and product innovation enables the company to get the right experience for their customers. This has been possible through the recruitment of employees with the right skills and knowledge. These employees are further trained to understand the company production strategies. Moreover, the company conducts more market research to ascertain customer thoughts and changing demands.
Expanded market
The Unilens Vision Incorporation has an active presence in all over America with an expanding presence in emerging markets including China, Japan, and Europe. In the past five years, revenues from sales doubled annually and the company expanded steadily.
Market experience
Having been in the health care sector within medical equipment and devices for over 26 years, the Unilens Vision Incorporation has acquired enough experience to compete favorably in the industry. It has had sufficient time to learn from its weaknesses and develop long-term strategies that will anchor it through the future of the market. As a way of adopting the emergent technological changes, the Unilens Vision Incorporation has invested in technological creativity to suit its consumer changing needs.
Strengths and Weakness
Strengths
The stable and management team comprising of directors and several managers is instrumental towards providing necessary support and guidance in provision of contact lens products to customers and reviewing current operational strategies in line with the demands of their clients at the Unilens Vision Incorporation. For instance, the management team introduced the online service in response to the demands of the clients. This has enabled the Unilens Vision Incorporation to fund different business project initiatives at affordable loan repayment interest rates. The Unilens Vision Incorporation enjoys a wide network with over 45 franchises and subsidiary in the US and several representative offices in different regions such as Western Europe.
The Unilens Vision Incorporation has been able to increase its level of sales and profits through increased consumer proximities, clear differentiation and segmentation of its brands, through the internationalization of its business models and expansion of own retail businesses. The Unilens Vision Incorporation has increased own retail business in the last few years, particularly in Western Europe and North America. Company owned retail stores have become growth drivers and important distribution points for the company. The vivid presentation of the Unilens Vision Incorporation brands through store ambience and image supports differentiated perception by consumers beyond their shopping experiences, further strengthening the brand image. Moreover, the establishment of a strong and reliable online store by the company represents a major growth for the company.
Weaknesses
The Unilens Vision Incorporation has more presence in Canada than other parts of the globe. Specifically, unlike its main competitors, the Unilens Vision Incorporation has few branches outside the US. Thus, the store does not enjoy the substantive demand in the global market as its customer catchment area is restricted to the boundaries of the US and Canada. Besides, the focus of the Unilens Vision Incorporation is more about customized contact lenses. Besides, the Unilens Vision Incorporation has high inventory cost since it has many stores across the US. Managing these stores may not be sustainable in the long run if the annual turnover reduces. As a result of these weaknesses, the Unilens Vision Incorporation has not been able to efficiently penetrate the market. The Unilens Vision Incorporation focus on quality products has compromised its ability to incorporate views of a section of its consumers. A section of the potential consumers feels that the company should produce reasonably priced and quality contact lenses for the low end market.
Notes to Consolidated Financial Statements
Notes to the consolidated financial statements gives detailed explanation of the values reported in the income statement, cash flow statement, statement of changes in equity, and the balance sheet statement. Further, the notes give details or explanation of the information that were not included in the financial statements. The financial statements of the company are accompanied by 20 notes. The first note focuses on the accounting policies employed by the company when preparing the financial statements. The second note gives more information on the unauthorized transaction related costs and recoveries. The third note gives information on accounts receivables. It gives information on the opening account balance, expensed provisions and amounts written off. The fourth note gives information on inventories that is, raw materials, work in progress, finished goods, and reserve for obsolete inventory. The fifth note gives information on equipment and leasehold improvement. It shows their opening balances, closing balances and accumulated depreciation (Ormiston 24).
The sixth note gives the opening balances, capitalized software cost, accumulated amortization, and closing balances for product software and development expenditure. The seventh note gives information on current and deferred income taxes. The eighth note gives information on the credit facility of the company and the interest rates. The ninth note gives information on accrued liabilities. The next note gives information on product warranty obligation. It shows the amount that the company spent on product warranty. Note eleven and twelve give information on deferred compensation and interest expense. Note thirteen and fourteen, give information on income per common and common stock equivalent share and stock option. The fifteenth note gives information on the stock purchase agreement. Note sixteen gives additional information on the cash flow statement. Note seventeen gives the amount the company contributed to the employee benefit plans. The eighteenth note gives a breakdown of foreign sales and significant customers. Note nineteen and twenty give information on commitments, contingencies and legal matters.
Evaluation of financial statements
Common size financial statements
Income statement
The table presented below shows the common size income statement for a period of five years.
Unilens Vision Inc.
Common size income statement
The expenses incurred on sales enhanced during the five years period. Further, the proportion of administration expense alternated with that of research and development. Further, it can be noted that there was a general increase in the proportion of total operating costs and expenses. This led to a decline in the operating income margin. The proportion dropped from 29.25% in 2010 to 19.10% in 2014. The company had a negative value of other non-operating items in the income statement. This can be attributed to the high values of interest expenses. The proportion of income before taxes and net income decline during the period. The statement shows that the overall profitability dropped.
Balance sheet
The table presented below shows the common size balance sheet for a period of five years.
Unilens Vision Inc.
Common size balance sheet
When reviewing assets, it can be noted that the current assets take a larger proportion than the non-current assets. Further, the proportion of the current assets dropped. Besides, accounts receivables, royalties, inventories, and deferred tax assets make a significant proportion of the current assets. Deferred tax assets and properties, plant and equipment make a significant proportion of the non-current assets. The values increased during the period. The value of current liabilities fluctuated during the period. The total liabilities accounted for more than 100% of total liabilities. Notes payable and deferred tax liability accounted for a significant proportion of the total liabilities. The additional paid-in capital was offset by the deficit. This created a negative balance of shareholders’ equity. The analysis shows that the company has a high leverage.
Short term liquidity
The liquidity ratios will be used to evaluate the short term liquidity of the company. The table presented below shows the liquidity ratios for the company.
There was a general decline in the liquidity ratios for the company with a slight increase in 2011. A decline in the liquidity ratios shows that the company is facing difficulties in paying current liabilities using current assets. Further, it can be observed that the current ratio is above one during the period. This implies the current assets exceeded the short term liabilities. It also implies that the company could not pay the current assets using the most liquid assets. The declining trend of the liquidity ratios can be attributed to the decline of current assets and growth in current liabilities. The ratios show that the financial health of the company deteriorated.
Capital structure and long term solvency
Analyzing the capital structure of the company and solvency is significant. The capital structure will give information on the leverage level of the entity. On the other hand, analyzing the solvency of the entity gives information on the ability of the company to pay interest expense.
The interest coverage ratio gives information on the ease with which the company can pay interest expense using income generated from key operating activities. The interest coverage ratio fluctuated during the period. Further, it can be noted that there was a general decline in the ratio. This shows that the solvency of the company deteriorated. The decline can be attributed to the increase in both operating income and interest expense. The capital structure shows the composition of debt and equity. In the table above, it can be observed that there was a general increase in the amount of debt in the capital structure. The value rose from $1,388,562 in 2010 to $5,240,858in 2014. Further, it can be noted that the value of equity was negative during the five year period. The highest value was ($888,503) in 2012 while the least value was ($3,027,103) in 2014. Since the value of debt exceeds equity, it implies that the company is entirely funded using debt. The table above also shows that the value of total liabilities was quite high. This can be attributed to the high amount of debt and deferred tax liability. As a result, the amount of deficit consumed all the share capital. This created the negative equity balance. Therefore, the capital structure of the company shows that the leverage level is more than 100%.
Operating performance and efficiency
In this section, profitability and efficiency ratios will be used to evaluate the operating performance and efficiency of the company.
The profitability ratios give information on the performance of the entity. The value dropped from 60.8 in 2010 to 54.4 in 2014. This can be attributed to a significant drop in revenue and increase in cost of sales. A decline in gross profit margin can be an indication that the company is facing difficulties in managing pricing and cost of sales. The operating profit margin also decline during the period. The ratio gives information on the income generated from the key operating activities of the company. Further, there was a slight decline in the value of net profit margin and return on assets of the entity. The net margin shows the ability of the company to manage the cost of operating the business effectively while return on assets shows that the ability of the company to generate income from a unit of asset declined. This can be an indication that the assets are dilapidated or the revenue declined. The return on equity for four years could not be estimated because the company had a negative equity balance during those years. A decline in the value of the profitability ratios shows that the performance of the entity dropped.
In the above table, it can be observed that the day sales outstanding dropped by a slight margin during the period. This implies that the shareholders are taking a shorter duration to pay their debt. The inventory also dropped by a slight margin during the same period. It implies that the company takes a shorter duration to replenish their inventory. The payables period fluctuated during the period. There was no trend in the number of days that the company pays the debtors. This shows that the creditors cannot predict how soon the company will settle their debt. The cash conversion cycle declined during the period. This shows that the period of time through which the company converts input into cash flow reduced. This implies that the company can convert input to output more easily. The fixed asset turnover decreased during the period. There was a general improvement in the efficiency ratio of the entity. Even though the performance of the entity decline, it can be observed that the efficiency ratios improved. Thus, there is a high potential for the company to grow in the future if the current trend of efficiency persists.
Market measures
There was an improvement in the value of the price earnings ratio. This shows that investors should be expecting to have high returns in the future. However, the price earnings ratio of the company was lower than the industry average. Unilens Vision Inc. had negative values of price to book ratio. The ratio gives information on the valuation of the entity. Since the ratios are negative for all the years, it means that something is essentially wrong with the company. The price to sales ratio for the entity fluctuated during the period. It is an indication of the value placed on the each dollar of sales for the entity. The values were relatively above average. Further, it can be noted that ratios for the company were slightly lower than the industry average. Finally, the price to cash flow ratio during the period surpassed the industry average in 2013 and 2014. The market value ratios cannot be used to ascertain whether the shares of the company are over or undervalued. However, the balances of shareholder’s equity and price to book ratio show that the company is facing financial problems (Subramanyam 56).
Outlook, Summary, and Conclusion
Outlook of performance
In the past years, the company has performed dismally. Analyst estimates that the performance of the growth over the past five years has been negative 3.86%. Even though the industry which the company operates in is expected to grow by about 15.03%, the future growth of the company may not be to that tune. Thus, the company is not expected to grow significantly in the future. However, the future performance cannot be predicted with certainty because there is no trend displayed during the past five years. The table presented below shows the projection of the earnings for the next year.
Investment potential
Based on the analysis above, the company is not suitable for investment. The capital raised by the shareholders has been consumed. The results show that the company is over levered. The profitability and liquidity of the entity dropped during the five year period. The efficiency level also improved. However, the market measures gave conflicting results on the valuation of shares for the company. Therefore, it is not advisable to invest in the company. A shareholder needs to monitor the trend of performance over time before committing capital.
Credit assessment
A review of the capital structure shows that the company has a lot of debt. A review of the financial statements shows that the debt is consumed by both the negative balance of shareholders’ equity and total assets. Therefore, it is not credit worthy.
Recommendations
From the research findings, it was apparent that comprehensive ratio analysis can not only assist in understanding the financial performance of a company, but also in focusing through the use of future performance projections. For instance, the liquidity ratio analysis presented an opportunity for understanding the capital structure and its behavior in the three companies and provided room for proactive comparison of the three companies. Apparently, all the ratios of the company declined over the five year period. Therefore, there is a need for the Unilens Vision Incorporation to raise the current ratio and quick ratio to 1 or more but not more than 2. The company also needs to improve its liquidity. This can be achieved through increasing the current assets. The company may reduce the average collection period. This is the time it takes to receive payment from its debtors. Unilens Vision Incorporation may also increase its levels of cash and cash equivalents. The focus should not be on increasing the stocks since there are associated costs that accrue when holding inventory as is the current situation. Finally, the company needs to manage the leverage level.
Summary and conclusion
Apparently, over the last five years, the growth of the company has decreased by negative 3.86%. Interestingly, the consolidated Gross Profit Margin experienced a decrease of 7.8% when computed as a percentage of total revenue. The value dropped from 60.8 in 2010 to 54.4 in 2014. However, the company has remained consistent and future projections indicated that the negative trend will last only in the short term. Therefore, a potential investor should wait for another one year to minimize any risk as a result of continued negative growth. This is necessary to monitor the trend of performance over the one year period before committing capital. However, there is a high potential for the company to grow in the future if the current trend of efficiency persists.
Works Cited
Ormiston, Fraser. Understanding Financial Statements. 7th ed. 2006. New York, NY: Cram 101 Incorporated.
Subramanyam, John. Financial Statement Analysis. 11th ed. 2013. New York, NY: McGraw- Hill Education. Print.
Unilens Vision Inc. Financial Reports – Annual reports. 2015. Web.