Running head: ASSESSING A COMPANY’S FUTURE FINANCIAL HEALTH 1

Assessing a Company's Future Financial Health

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ASSESING A COMPANY’S FUTURE FINANCIAL HEALTH 2

Assessing a Company's Future Financial Health

Introduction

The financial health of any business organization is crucial to its continued survival and

performance in the market. When a company’s financial health is good, it is likely to continue

operating successfully in the market (Kou, Peng & Wang, 2014). On the other hand, if the

financial health of a firm is bad, it runs the risk of being bankrupt. In this paper, the paper,

various financial risks are examined, especially in relation to how it affects SciTronics, Inc.

Systematic and Unsystematic Risk

Systematic risk is the risk tied to the larger market while unsystematic risk is the risk

which is specific to a firm or industry. One of the differences between systematic an

unsystematic risk is systematic risks cannot be controlled while unsystematic risks can be

controlled (Waemustafa & Sukri, 2016). This is because systematic risks are out of the reach for

a business organization while unsystematic risks are within the organization (Waemustafa &

Sukri, 2016). Another difference is systematic risks occur because of external factors which may

include social, economic, and political while unsystematic risks occur because of internal factors

within an organization. Lastly, systematic risks are affects the industry, market and the larger

economy while unsystematic risks affect only a specific organization or industry.

Financial Risks

Some of the financial risks that affect companies are interest rate risk, economic risk,

credit risk, and operational risk. Each of these risks has particular potential impacts on

SciTronics, Inc. For example, interest rate risk has the potential of reducing the value of the
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company’s fixed-rate investments (Kou, Peng & Wang, 2014). The interest rate risk has also the

potential of increasing the credit risk of the company. This is because as interest rate increases, a

firm’s equity falls.

The economic risk, on the other hand, has the potential of bring down the company. This

is because economic risks affect whole industries and even economies (Kou, Peng & Wang,

2014). For example, the 2008 financial crisis affects many nations around the world and affected

many companies, leading to the collapse of even some of the most established companies.

Economic risks can thereby lead to the collapse of SciTronics, Inc.

Credit risk is the possibility of a firm incurring a loss due to failure of a borrower to meet

contractual obligations or repay a loan. For the SciTronics, Inc, credit risk may negatively affect

its cash flow due to failure of debtors to pay for the goods purchased on credit (Kou, Peng &

Wang, 2014). It may also increase the cost of collection, thereby having an overall negative

impact of on the firm’s profitability.

Lastly, operational risk is the risk of loss due to ineffective or failed internal processes,

systems, and/or people (Kou, Peng & Wang, 2014). The potential impacts of operational risks for

the company include monetary loss, business failure, and loss of competitive advantage.

Lower growth impact

Like any other company, SciTronics, Inc may experience a lower growth in sales.

Lower growth in sales leads to reduced contribution margin that ultimately impacts the dividend

payable (Husain & Sunardi, 2020). This means that the company may come up with a dividend

policy that reduces the amount of dividends paid to shareholders. Similarly, the lower growth in

sales results in reduced profitability and thereby lower retained earnings.

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Higher growth impact

Higher growth in sales can result in a dividend policy that provides a higher amount of

dividends to shareholders. This is because of the increased profitability due to increase in sales

(Husain & Sunardi, 2020). On the other hand, higher growth in sales increases the amount of

retained earnings. This is due to increased profitability as a result of increase in sales.

Conclusion

Basically, financial risks such as credit risk, operational risk, and economic risk can have

a negative impact on the financial performance of SciTronics, Inc. On the other hand, the level of

growth in sales affects the dividend paid and amount of retained earnings in the company.
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References

Husain, T., & Sunardi, N. (2020). Firm's Value Prediction Based on Profitability Ratios and

Dividend Policy. Finance & Economics Review, 2(2), 13-26.

Kou, G., Peng, Y., & Wang, G. (2014). Evaluation of clustering algorithms for financial risk

analysis using MCDM methods. Information sciences, 275, 1-12.

Waemustafa, W., & Sukri, S. (2016). Systematic and unsystematic risk determinants of liquidity

risk between Islamic and conventional banks. International Journal of Economics and

Financial Issues, 6(4), 1321-1327.