Financial Ratios. Jardine Cycle and Carriage - Research Paper Example

?Stock Analysis Table of Contents Introduction 3 1 Financial Health of the Company 3 2 Investment (Investors Objective of the Company 4 2. Company Financial Background 4 3. Financial Ratio Analysis 6 3.1 Profitability Ratio 6 3.2 Liquidity Ratio 8 3.3 Gearing Ratio 9 3.4 Investment Ratio 11 4. SWOT Analysis from Financial Perspective 13 5. Conclusion and Recommendation 14 6. References 16 16 7. Appendices 21 7.1 Appendix 1: Profit and Loss Account of Jardine Cycle & Carriage Ltd. (2010, 2009, 2008, 2007) 21 7.2 Appendix 2: Balance Sheet of Jardine Cycle & Carriage Ltd. (2010, 2009, 2008, 2007) 24 7.3 Summary/Workings for Financial Ratios 27 1. Introduction 1.1 Financial Health of the Company Jardine Cycle and Carriage Limited is an investment bearing company. The company is engaged in the processes of manufacturing, assembling, distributing and selling through retail chains various motorcycles and motor parts. The company operates in various parts of the world: Singapore, Vietnam, Indonesia and Malaysia (Bloomberg Business Week, 2011). The paper has been designed with the aim of assessing the financial position of the company. Although Jardine Cycle and Carriage is a company dealing with diversifying businesses, the focus of the company is upon the market of Southeast Asia (Jardine Cycle & Carriage Ltd., 2011). In the list of Singapore’s top companies, Jardine Cycle and Carriage is raked within the top 20 positions. The company is holding a stake of 50.1% in Astra and has strong strategic interest upon it. However, the company undertakes its business within the automotive segment of the market. In the recent times, the financial health of the company is much influenced by its record performance due to its stake in Astra. Though the conditions of trading in Singapore and Vietnam stock markets are challenging, the company has depicted satisfactory performance for its stakeholders. The satisfaction was provided through announcement of proposed 69% enhancement in the full year dividend of the company. The financial health of the company can be summarised through the fact that the chief businesses of the company had achieved a tremendous growth during the year 2010. The financial health even strengthened through the firmness of Rupiah in Indonesia (Jardine Cycle & Carriage, 2010). 1.2 Investment (Investors’) Objective of the Company The investment objective of Jardine Cycle and Carriage from the perspective of enhancing investors’ stake in the company is to attain a wider foundation of earning for the investors. The company aims at continuously striving for investment opportunities with sustenance of its investment position in its various business segments, i.e., financial services, automotive, agribusiness, infrastructure and logistics, heavy equipment and mining and information technology (Jardine Cycle & Carriage Ltd., 2011). The group Managing Director (MD) is confident about the future outlook of the company in the coming days and hopes that the company would definitely succeed in sustaining its strong position within the region’s automotive market. The investment decision that the company wants to sustain for maintaining its strong position within the market is with regards to extension of its assortment of dealerships all around the world (Jardine Cycle & Carriage Ltd., 2011). 2. Company Financial Background The financial background of the company is much dependent upon the business activities that it performs. The following figure depicts the groups of business activities performed by Jardine Cycle and Carriage: Source: ((Jardine Cycle & Carriage, 2010). Astra, where the company holds its major stake, had depicted great performance during the year 2010 with record profit earnings. Astra performed excellently in each segments of its businesses apart from contract mining. The functions of Astra with respect to its consumer finance segment were able to generate enormous profits with the improvement in the debt position, constant margin of interest rates and proficient liquidity position within the banking sector. However, due to a sharp decrement in the sale quota for new vehicles by the government, the motor business operations in Singapore experienced production of low profit. Although the sale of Mercedes-Benz was flexible, it was still not enough to offset the deficit of sales in cars such as Kia and Mitsubishi. Supported by the enormous performance of Astra during the year 2010, the underlying profit of the group as a whole was recorded to be 812 million US Dollar. It was an increment by 55% from the past year’s performance. The earnings per share during the same period also increased by 55% and the profit available to shareholders were 944 million US Dollars. The net asset value of the group which stood at 3.7 billion Dollars during the end of the year 2010 was also higher by 29% than net asset value during the year 2009. The contribution of Astra towards enhancement of performance of the group was enhanced by 62% from the previous year 2009 and reached 798 million Dollars during the year 2010. However, the contribution of the other motor interests towards the group’s performance decreased during the same period by 5% and reached 56 million Dollars. This was hugely due to the lower level of income from Singapore operations of the company (Jardine Strategic Holding Limited, 2011). The group’s contribution towards purchase of intangible assets also increased during the same period from the year 2009 to 2010 and reached 29.6 million Dollars from 23.1 million Dollars. Acquirement of plant and machinery and property was up during the period and stood at 382.7 million Dollars in the year 2010 as against 228.9 million Dollars in the year 2009 (Financial Times, 2011). 3. Financial Ratio Analysis 3.1 Profitability Ratio Return on Assets The first profitability ratio that will be utilised in this paper is that of Return on Assets. This ratio is an indication of the businesses’ profitability in relation to its assets. The ratio also signifies the ability of the company in efficiently controlling its asset for the purpose of making profit. A high return on asset ratio is favourable for the profitability of the companies (Loth, 2011). The return on assets for Jardine Cycle and Carriage is 17.62% which is not so bad in terms of its profitability as compared to efficiency of the firms within its industry. Return on Equity The return on equity is used to calculate effectiveness of the company through comparing the net earnings of the company to the shareholder’s equity measured on an average. This ratio measures the earnings of the shareholders from the investment that they made upon the company. The efficiency of the company can be measured with the help of this ratio and a high return on equity ratio would indicate strong position of the company (Loth, 2011). Measuring the return on equity for Jardine Cycle and Carriage, the result accumulated was 67.45% which is very fine. Thus, as per the profitability of the company with respect to return on assets, the company stands at a competitive position within the automotive industry in Singapore. Gross Profit Margin Gross profit margin is the amount that is earned by a company with respect to a percentage amount of the sales generated. The aim of gross profit margin analysis is to assess the level of uniformity or the company’s trend of earning over a certain period of time. Gross profit margin for a single year determines the profitability of the company for the selected year alone (Loth, 2011). The gross profit margin of Jardine Cycle and Carriage has been measured to be 18.03% which can be termed as moderately stable for the company as compared to the ratios during the previous years. Return on Capital Employed Return on capital employed is another important profitability determinant of a company expressed in percentage. This ratio is complementary to the return on equity ratio as it adds the debt liabilities of the company into the latter. This ratio provides the opportunity to the investors to assess as to how the utilisation of leverage is affecting the profitability of the company. This ratio is assumed to be more effective because it determines the management’s capability of engendering earnings from the firms’ entire mode of capital employment (Loth, 2011). The return on capital employed for Jardine Cycle and Carriage has been derived to be 42.40% which is quite high. Hence, the profitability of the company with respect to this measurement is strong. 3.2 Liquidity Ratio Current Ratio Current ratio is that measure for the purpose of assessing the liquidity standing of a company. It is also a measure for assessing the present working capital situation of a company. It is represented as the proportion of current assets available for a company in order to guard its current liabilities. The standard current ratio (equal or more than 2) is better for a company (Loth, 2011). The current ratio of Jardine Cycle and Carriage is 1.26. Thus, as per the working capital position of the company is concerned, it cannot be considered to be holding much strong position. Quick Ratio Quick ratio provides further refining to the current ratio through measurement of the most liquid assets of a company that are existing for ‘paying off’ the current liabilities. This ratio represents the company’s liquidity position in a more conventional way than current ratio. This is because it keeps out every current asset of the company that are difficult to be easily transformed into cash. Hence, the company with high quick ratio is in a good position (Loth, 2011). The quick ratio of Jardine Cycle and Carriage has been calculated to be 0.22 which is not so stable for the company. Thus, considering the current ratio and quick ratio for the company, it would be vital to mention that the company should seriously focus upon enhancing its liquidity position. Net Working Capital Ratio This ratio is measured by dividing the net working capital of a company by the total assets available to the company. This ratio is an indicator as to how much the company is efficient to utilise its available net working capital. A positive ratio in this regard is an indicator that the company is liable to pay its liabilities that are short-term in nature (CPAClass, 2011). In the case of Jardine Cycle and Carriage, the net working capital ratio has been calculated to be 0.078 which is although low, still positive. Hence, the company should be careful about this aspect and try out means to improve this ration. Enhanced sales would be an effective option for the company to handle this situation. 3.3 Gearing Ratio Debt Ratio Debt ratio is measured for comparing the total debt of a company to that of its total assets. This ratio provides the basis of generating a general notion about the amount of the company’s leverage. This ratio has to be lower if the company is not reliant much upon borrowed money. Lower debt ratio would signify strong position of the company. Conversely, higher debt ratio would signify more risky situation of the company (Loth, 2011). The debt ratio of Jardine Cycle and Carriage is 44.57% which signifies that the company is much dependent upon the leverage and thus is risky. The company should strive for reducing this ratio in the future for avoiding risk perception by the investors about the company’s financial standing. Debt-Equity Ratio The debt-equity ratio, to a large extent, determines another dimension for evaluating the leverage position of a company like that of debt ratio. But, in this case, the total amount of the company’s liabilities is divided by the shareholder’s equity. However, the interpretation is the same as that in the previous case (Loth, 2011). For Jardine Cycle and Carriage, the debt-equity ratio is also very high and stands at 80.4%. This is a matter of concern for the company as the investor might develop the perception of not investing in the company measuring it to be very risky. Capitalisation Ratio The capitalisation ratio is used to measure the element of debt in order to evaluate the capital structure of that company. This ratio is measured by dividing the long-term amount of debt of the company by the total of long-term debt and shareholder’s equity of the company. In generic terms, low level of debt and high shareholder’s equity determine good quality of the company’s investment position (Loth, 2011). In this regard, the situation of Jardine Cycle and Carriage’s investment position can be considered to be quite strong. This is because the ratio calculated is 16.13% which is quite low. 3.4 Investment Ratio Price/Earnings Ratio The price/earnings ratio is the most popular indicator for investment choice. There are certain imperfections in such ratios but still they are mostly used by the investors for taking investment decision. This is calculated by dividing the stock price of a company by the earnings per share available to the investors. The result of the ratio indicates as to how many times the company’s stock has been traded in the market per each unit of the earnings per share (Loth, 2011). The price/earnings ratio of Jardine Cycle and Carriage is 12.34 (Stock price $37.15 and EPS $3.01 as of 1:39 AM 09/23/11) which indicate that for each Dollar earning of the company, the investors would have to pay $12.34 (Bloomberg Business Week, 2011). Price/Sales Ratio The price/sales ratio is another important indicator for valuation of stock in addition to price/ earnings ratio. The only difference between the two ratios is that in the case of price/sales ratio, the stock price is compared to the company’s sales. Similar to the price/earnings ratio, in this case, the result indicates the amount that the investors would have to pay for each unit of company’s revenue (Loth, 2011). The price/sales ratio for Jardine Cycle and Carriage has been estimated to be $0.84. Hence, the investors of the company would be paying 0.84 times for each Dollar of the company’s sales. Dividend Yield The dividend yield of a company’s stock is articulated as a percentage and is intended by dividing dividend per share of the company by its stock price at a particular date. The valuation to the stock that accumulates dividend is provided by the income investors whereas this measure is not trusted by the growth investors. This is because the latter prefers to earn huge amount of capital gains. Irrespective of the perception by different categories of investors, the trend depicts that the stocks accompanied by dividend payment have performed significantly better than that of the stocks not accompanied by payment of dividend (Loth, 2011). The dividend yield for the stock of Jardine Cycle and Carriage is 2.56%. 4. SWOT Analysis from Financial Perspective Strength The prime financial strength of Jardine Cycle and Carriage at present is that during the last year, it has performed in a financially stable mode. The company has experienced increment in its revenue, operating profit and accumulated assets among others. Moreover, from the financial ratio analysis of the company, it is evident that the company is holding a strong profitability position within the industry. In addition to this, the financial analysis also depicted good prospect of investment from the point of view of the investors. Thus, the company can be anticipated to remain profitable in the future courses of time as well. Weakness From the financial point of view, one of the crucial weaknesses of Jardine Cycle and Carriage is in relation to its liquidity position. The company should heavily focus upon transformation of its liquidity position within the present market scenario. Strategies such as speeding up the period of collection from customers, providing discount on early payment of bills and several others can be followed by the company for enhancing its liquidity position. Opportunity The most important business opportunity of Jardine Cycle and Carriage is present within the international market. The enormously profitable performance of Astra during the year 2010, where the company holds major stake is an indication for its prospect towards investment in the international market. The company thus should continue to increase its number of dealers throughout the world in order to sustain its growth prospect in this regard. Threat Jardine Cycle and Carriage is exposed to financial risk and thus it is threatened by credit risk, liquidity risk and market risk. Threat from the market risk can arise due to fluctuations within the foreign exchange market, rate of interest and prices within the market. Risk of credit can arise for the company due to inability of its customers to pay off their debt within due time. Moreover, from the financial analysis, it has been empirically found that the company is much dependent upon leverage. Hence, the default risk of deterioration is obvious for the company. Liquidity risk is also evident from the financial analysis and the company is required to comprehensively undergo efficient financial risk management in order to perform competently within both the national as well as international market (Jardine Cycle & Carriage Limited, 2010). 5. Conclusion and Recommendation The findings of the research suggest that Jardine Cycle and Carriage is an efficient company bestowing its excellence in many parts of the world. With regards to the company’s profitability and stability position, the results of the financial analysis suggested that the company holds a strong position within the industry where it operates, i.e. the automotive industry. However, it has been evaluated that the company is required to take into consideration its liquidity position and also the credibility of its customers. Along with this, the company should be cautious and aware about enhancement of its gearing ratios. It is recommendable to the company to reduce its leverage position and increase financing through equity. The company should try out attractive means for attracting investors and enhance their equity holding within the country. Provision of attractive portfolio with inclusion of attractive and profitable characteristics for the investors would help in enhancing financing of the company through equity. For the purpose of mitigating credit risk that can arise due to its customers’ inability to pay off debt effectively, there are several measures that can be undertaken by the company. The measures can be to appoint effective account management team for the most effective scrutiny of the financial status of its customers. The company can also appoint special personnel for undertaking investigation in cases of probable cases of fraud by the customers. Effective and timely collection and recovery of credit granted to the customers is also equally important (Basel Committee on Banking Supervision, 2001). For the purpose of improving liquidity position of the company, it is essential that the company maintains optimum level of inventory. In fact, the company should try to maintain as low inventory as possible without adversely affecting the operational efficiency of its business. For making this process effective, it is again essential that the company utilises effective techniques of predicting inventory requirements for certain future period of time. In order to enhance the net working capital position, the company can also strive for generating alternative effective ways of preserving materials other than keeping huge inventory (American Brush Manufacturers Association, 2011). Considering the present profitable and stable position of the company, it is recommendable to buy the stocks. Despite the inclusion of heavy leverage within the capital structure of the company, it holds strong prospect for growth, both in the short run as well as in the long run. Hence for the investors, the stocks of the company are profitable options for ‘strong buy’. 6. References American Brush Manufacturers Association, 2011. Liquidity. Uploads. [Online] Available at: http://www.abma.org/upload/ProfitCents_Extreme_Sample.pdf [Accessed September 23, 2011]. Basel Committee on Banking Supervision, 2001. The Standardised Approach to Credit Risk. Superseded Document. [Online] Available at: http://www.bis.org/publ/bcbsca04.pdf [Accessed September 23, 2011]. Bloomberg Business Week, 2011. Jardine Cycle & Carriage Ltd (JCNC:Singapore). Research. [Online] Available at: http://investing.businessweek.com/research/stocks/snapshot/snapshot.asp?ticker=JCNC:SP [Accessed September 22, 2011]. CPAClass, 2011. Accounting Ratios for Financial Statement Analysis. Financial Ratios. [Online] Available at: http://cpaclass.com/fsa/ratio-01a.htm [Accessed September 23, 2011]. Financial Times, 2011. Jardine Cycle & Carriage Ltd. Research. [Online] Available at: http://markets.ft.com/research/Markets/Tearsheets/Business-profile?s=C07:SES [Accessed September 22, 2011]. Jardine Cycle & Carriage Ltd., 2011. Company History. Corporate History. [Online] Available at: http://www.jcclgroup.com/corporatehistory1.asp [Accessed September 22, 2011]. Jardine Cycle & Carriage Ltd., 2011. Group MD’s Message. Corporate Message. [Online] Available at: http://www.jcclgroup.com/corporatemessage.asp [Accessed September 22, 2011]. Jardine Cycle & Carriage, 2010. Annual Results 2010 Presentation to Analysts 25th February 2011. ar2010. [Online] Available at: http://www.jcclgroup.com/pdf/ar2010.pdf [Accessed September 22, 2011]. Jardine Strategic Holding Limited, 2011. Jardine Cycle & Carriage Limited 2010 Financial Statements and Dividend Announcement. Press Release. [Online] Available at: http://www.jardines.com/assets/files/NewsAndEvents/corporate-press-releases/jardine-strategic/p110225.pdf [Accessed September 22, 2011]. Jardine Cycle & Carriage Limited, 2010. Annual Report 2010. Ar2010. [Online] Available at: http://www.jcclgroup.com/pdf/ar2010/Financial%20Statements.pdf [Accessed September 23, 2011]. Loth, R., 2011. Profitability Indicator Ratios: Return On Assets. Investopedia. [Online] Available at: http://www.investopedia.com/university/ratios/profitability-indicator/ratio3.asp#axzz1YejaXkqB [Accessed September 22, 2011]. Loth, R., 2011. Profitability Indicator Ratios: Return On Equity. Investopedia. [Online] Available at: http://www.investopedia.com/university/ratios/profitability-indicator/ratio4.asp#axzz1YejaXkqB [Accessed September 22, 2011]. Loth, R., 2011. Profitability Indicator Ratios: Profit Margin Analysis. Investopedia. [Online] Available at: http://www.investopedia.com/university/ratios/profitability-indicator/ratio1.asp#axzz1YejaXkqB [Accessed September 22, 2011]. Loth, R., 2011. Profitability Indicator Ratios: Return On Capital Employed. Investopedia. [Online] Available at: http://www.investopedia.com/university/ratios/profitability-indicator/ratio5.asp#axzz1YejaXkqB [Accessed September 22, 2011]. Loth, R., 2011. Liquidity Measurement Ratios: Current Ratio. Investopedia. [Online] Available at: http://www.investopedia.com/university/ratios/liquidity-measurement/ratio1.asp#axzz1YejaXkqB [Accessed September 23, 2011]. Loth, R., 2011. Liquidity Measurement Ratios: Quick Ratio. Investopedia. [Online] Available at: http://www.investopedia.com/university/ratios/liquidity-measurement/ratio2.asp#axzz1YejaXkqB [Accessed September 23, 2011]. Loth, R., 2011. Debt Ratios: The Debt Ratio. Investopedia. [Online] Available at: http://www.investopedia.com/university/ratios/debt/ratio2.asp#axzz1YejaXkqB [Accessed September 23, 2011]. Loth, R., 2011. Debt Ratios: Debt-Equity Ratio. Investopedia. [Online] Available at: http://www.investopedia.com/university/ratios/debt/ratio3.asp#axzz1YejaXkqB [Accessed September 23, 2011]. Loth, R., 2011. Debt Ratios: Capitalization Ratio. Investopedia. [Online] Available at: http://www.investopedia.com/university/ratios/debt/ratio4.asp#axzz1YejaXkqB [Accessed September 23, 2011]. Loth, R., 2011. Investment Valuation Ratios: Price/Earnings Ratio. Investopedia. [Online] Available at: http://www.investopedia.com/university/ratios/investment-valuation/ratio4.asp#axzz1YejaXkqB [Accessed September 23, 2011]. Loth, R., 2011. Investment Valuation Ratios: Price/Sales Ratio. Investopedia. [Online] Available at: http://www.investopedia.com/university/ratios/investment-valuation/ratio6.asp#axzz1YejaXkqB [Accessed September 23, 2011]. Loth, R., 2011. Investment Valuation Ratios: Dividend Yield. Investopedia. [Online] Available at: http://www.investopedia.com/university/ratios/investment-valuation/ratio7.asp#axzz1YejaXkqB [Accessed September 23, 2011]. 7. Appendices 7.1 Appendix 1: Profit and Loss Account of Jardine Cycle & Carriage Ltd. (2010, 2009, 2008, 2007) Profit & Loss Account for the Year 2010 and 2009 Profit & Loss Account for the Year 2009 and 2008 Profit & Loss Account for the Year 2008 and 2007 7.2 Appendix 2: Balance Sheet of Jardine Cycle & Carriage Ltd. (2010, 2009, 2008, 2007) Balance Sheet for the Year 2010, 2009 and 2008 Balance Sheet for the Year 2008 and 2007 7.3 Summary/Workings for Financial Ratios Profitability Ratio (a) Return on Assets = Net Income / Average Total Assets = 2244.2 / {(14535.1+10943.2)/2} = 17.62% (b) Return on Equity = Net Income / Average Shareholder’s Equity = 2244.2 / (3743.1+2910.9)/2 = 67.45% (c) Gross Profit Margin = Gross Profit / Net Sales = 2827.4 / 15680.2 = 18.03% (d) Return on Capital Employed = Net Income / Capital Employed = 2244.2 / (421.9+1128.0+3743.1) = 42.40% Liquidity Ratio (a) Current Ratio = Current Assets / Current Liabilities = 5482.4 / 4346.3 = 1.26 (b) Quick Ratio = Quick Assets / Current Liabilities = (5482.4-1310.4-3199.8) / 4346.3 = 0.22 (c) Net Working capital Ratio = Net Working capital / Total Assets = (5482.4-4346.3) / 14535.1 = 0.078 Gearing Ratio (a) Debt Ratio = Total Liabilities / Total Assets = 6477.8 / 14535.1 = 44.57% (b) Debt-Equity Ratio = Total Liabilities / Shareholder’s Equity = 6477.8 / 8057.3 = 80.4% (c) Capitalization Ratio = Long-Term Debt / (Long-Term Debt + Shareholder’s Equity) = 1549.9 / (1549.9+8057.3) = 16.13% Investment Ratio (a) Price/Earnings ratio = Stock Price per Share / Earnings per Share = $37.15 / 3.01 = $12.34 (b) Price/Sales Ratio = Stock Price per Share / Net Sales (Revenue) per Share = $37.15 / (15680.2/355.7) = $0.84 (c) Dividend Yield = Annual Dividend per Share / Stock Price per Share = 0.95 / 37.15 =2.56% Read More