However, we can see in 2001 that the company has worked out many of the difficulties associated with the purchase. The long-term debt is being reduced. Many of the costs that had skyrocketed were brought under control. Thus, while revenues increased, expenses such as R&D and interest decreased. Other expenses grew at a slower rate than did revenues. Selling expenses grew at half the rate of revenues, and G&a expenses were held stable in 2001. These cost controls returned XYZ to profitability. Overall, XYZ is a rapidly growing company with a strong financial position. They have strong liquidity ratios and can easily meet the interest on their debt obligations. They are whittling down their long-term debt as well. The firm enjoys high rates of return on both assets and equity as well, although the new, larger firm does not return as well as it did when it was small and growing exponentially.

While many key metrics are not as strong as they were in the past, there are two things to consider. As an example, the receivables turnover is at a relatively low level compared with past performance. However, the level is still respectable. Moreover, it improved last year. The operating margin is worse today than it was a few years ago, but again it is not poor by any means.

The other main point to consider is that XYZ is a growing company. In their early years, financial improvements were exponential. The firm was very profitable, but the business was clearly limited. The company made a large acquisition in 1999 and their performance slipped thereafter. Yet, this is merely growing pains. Growth rates decline as infant companies begin to mature. Acquisitions that are critical for long-term growth and strength may not have readily apparent benefits to the bottom line. In fact, the absorption and turnaround period for XYZ following its acquisition was very rapid, and the company is making excellent progress towards returning financial performance to its pre-acquisition...

The company is strong, its metrics are good. There was a slight blip related to a major event in 1999 that we can reasonably understand to be an acquisition. Equity is growing, debt is decreasing; revenues are growing, expenses are decreasing. Customization is emerging as a great business for XYZ, where revenues grew 43.5%. There are a lot of reasons for optimism and few reasons for pessimism when the company's long-term financial performance is taken into account.
Recommendations would recommend that XYZ continue to carry on their current path. The company had a tough year in 2000, but they have moved to rectify many of the problems. The R&D budget had become bloated, but they have reduced costs, presumably due to achieving greater synergies as a result of more thorough integration of two different R&D operations. XYZ should also continue to retire the debt it acquired. Doing so would give them the option to issue more debt should they so desire to raise more capital, or make another acquisition.

There are a couple of areas of relative weakness that could be addressed. One is the accounts receivable. While many areas of the company improved significantly in 2001 versus 2000, a/R only saw marginal improvement. More focus should be placed on improving the receivables turn, as that is money the firm could be re-investing. Stronger working capital management demands faster receivables turns.

Another relatively area of weakness to be dealt with is that of selling expenses. These increased in 2001 at a pace almost as quick as that of revenues. To me that indicates that our sales and marketing teams did not improve their efficiency last year. I want to see selling expenses held in check, but without a noticeable sacrifice in performance. That is to say, I recommend XYZ freeze the marketing budget and demand that their…