Chemalite Case

1. Financial Statements
2. Performance Analysis:

1. From 01/01/2003 to 06/30/2003:

During the first six months of 2003, Chemalite has just been established, so there were no selling activities. During this period, Alexander issued $500,000 of common stock in exchange for the patent of chemalite and liquid cash. Cash was then invested in so-called incorporation expenses including legal fees, charter costs, and printing expenses. Besides, necessary raw materials and machinery that will be used in production process were also bought in late June to prepare for the coming full operation. In terms of 20-year-life patent, although Alexander expected competitors to develop equivalent products without patented technique in five years, Chemalite could still enjoy the substantial benefit brought by patent for a long period. Even though the expected equivalent products without patented technique might exist, the cost could not be lower than the current product. Therefore, the investment in patent is beneficial.

To sum up, all of these seemed to be normal preparation for a new startup business. Instead of calling them expenses, I would consider them as necessary and worthy investments.

1. From 07/01/2003 to 12/31/2003:

Since the second half year Chemalite has gone into full operation and has been growing successfully. In order to describe company performance more clearly, we made a financial health analysis, which is shown below:

Starting from July, operations have been going swiftly and we have started to see the startup business grow firmly. Gross margin is as high as 27.77% (=209,500/704,500), which indicates that Chemalite have been generating a significant amount of sales revenue in excess over the cost of the inventory sold. When we look at our income statement we see that the company generated $46,875 in profits, therefore owner’s equity has increased by the same amount as a result of the operations. Inventory turnover is 3.55 (=195,000/69,500) which shows that Chemalite Inc. has cost of goods sold that is 3.55 times its average inventory level. This means that the company holds its inventory at an average of 102.81 days (365/3.55). This number is relatively low; but considering that Chemalite is a new startup business in the new market and that the company was into operation for only six months, it might be understood. Looking at the return on common stockholder’s equity, the company realized a 8.69% ratio, meaning for each 1$ invested or reinvested by common stockholders, Chemalite Inc. generates $0.09 of net earnings.