Medifast,Inc., is a producer and marketer of weight-loss meals and other health
ID: 462445 • Letter: M
Question
Medifast,Inc., is a producer and marketer of weight-loss meals and other health and weight-loss products. Following are selected finfncial data for the company for the priod 2006-2010.
Growth rate in sales
a. Calculate Medifast's annual sustainable growth rate for the years 2006-2010.
b. Comparing the company's sustainable growth rate with its actual growth rate in sales, what growth management problems did Medifast fave over this period?
c. How did the company cope with these problems?
2006 2007 2008 2009 2010 Profit margin(%) 6.00 7.00 4.60 5.20 7.20 Retention Ration (%) 99.50 100.00 100.00 100.00 100.00 Asset turnover (X) 1.33 2.02 1.92 2.07 2.64 Fianacial leverage (X) 1.61 1.69 1.57 1.57 1.64Growth rate in sales
46.80 84.60 13.10 25.90 57.10Explanation / Answer
a. Computation of annual sustainable growth rate:
b. The management faced the problem that the actual growth rate in sales was far higher than the sustainable growth rate, raising the concern that operating cash flows would get exhausted at a very high rate.
c. The management coped with the problems by decreasing its dividend payout ratio and consequently increasing its retention ratio.
2006 2007 2008 2009 2010 ROE ( %) 12.85 23.90 13.87 16.90 31.17 Retention ratio ( % ) 99.50 100 100 100 100 Sustainable growth rate ( %) 12.79 23.90 13.87 16.90 31.17 Growth rate in sales 46.80 84.60 13.10 25.90 57.10