Financial Statement and Cash Flow - Essay Example

? Financial ment and Cash Flow of the of the Part A Free Cash Flow of Jaedan Free cash flow givesthe measure of the financial performance of a particular company. It generally represents the amount of cash that the company can generate after spending the amount of money required to expand or maintain the existing asset base. The calculation of free cash flow is important as it helps the company to understand the opportunities and scopes which will enable to maximize the shareholder’s wealth. The calculation of free cash flow is mentioned below: Free Cash Flow= Earnings before Interest and Tax (1-Tax Rate) + Depreciation – Total Change in the Net Working capital – Capital Expenditure Calculation of Free Cash flow Particulars Amount(in $) EBIT 13119000 Depreciation 800000 Tax Rate 34% Change in Fixed assets 2932000 Changes in Current assets 4530181 Changes in Accruals 150000 Changes in Accounts Payable 190000 Changes in Net Working Capital 4168181 Capital Expenditure 7802181 Free Cash Flow -2511822 The free cash flow of the company is $ 2511822. 2) Liquidity position of Jaedan The liquidity position of a firm helps in determining its ability in meeting up the short term obligations without any strain. The liquidity of a firm contributes to its profitability. Liquidity Position of Jaedan is given as below:  Current Ratio Jaedan Industry Average Year 2009 2010 2009 2010 Current assets 10535819 15066000     Current liabilities 3980000 4342000     Current Ratio 2.65 3.47 2.89 3.26 The current ratio of Jaedan for the year 2009 and 2010 is 2.65 and 3.47. Quick Ratio Jaedan Industry Average Year 2009 2010 2009 2010 Current Assets - Inventory 7325819 10948000     Current Liabilities 3980000 4342000     Quick Ratio 1.84 2.52 1.42 2.19 The quick ratio of Jaedan for the year 2009 and 2010 is 1.84 and 2.52. 3) Debt and Profitability Ratio of Jaedan This part of the study will display the debt repaying capability of Jaedan followed by its profitability for the year 2009 and 2010. 1) Debt Ratio   Jaedan Industry Average Calculation of Debt Ratio 2009 2010 2009 2010 Total Liabilities 7026000 7388000     Total Assets 17254819 23917000     Debt Ratio 0.40719059 0.308902       40.72% 30.89% 41.93% 39.36% 2) Asset To Equity Ratio Calculation of Asset to Equity Ratio Jaedan Industry Average Year 2009 2010 2009 2010 Total Asset 17254819 23917000     Total Equity 10128819 16257018     Asset to Equity Ratio 1.70353711 1.47118       170.35% 147.12% 165.82% 163.13% 3) Debt to Equity Ratio Calculation of Debt to Equity Ratio Jaedan Industry Average Year 2009 2010 2009 2010 Total Debt 3046000 3046000     Total Equity 10128819 16257018     Debt to Equity Ratio 0.30072608 0.187365     Debt to Equity Ratio (in percentage) 30.0726077 18.73652 31.26% 30.23% 4) Times Interest Earned Calculation of Times Interest Earned Jaedan Industry Average Year 2009 2010 2009 2010 EBIT 9873447 13119000     Interest Expenses 375000 738800     Times Interest Earned 26.33 17.76 15.72 16.81 5) Gross Profit margin Gross Profit Ratio Jaedan Industry Average Year 2009 2010 2009 2010 Gross Profit 11573447 15540000     Sales 38578155 42000000     Gross Profit Ratio 30.0000013 37 22.19% 23.74% 6) Operating Profit margin Operating profit Margin Jaedan Industry Average Year 2009 2010 2009 2010 Operating Profit 9873447 13119000     Sales 38578155 42000000     Operating Profit Ratio 25.59 31.24 19.32% 20.89% 7) Net Profit Margin Net Profit Ratio Jaedan Industry Average Year 2009 2010 2009 2010 Net Profit 6268975 8170932     Sales 38578155 42000000     Net Profit Ratio 16.2500643 19.4546 15.11% 17.97% 4) Market Ratios of Jaedan 1) Calculation of Price Earnings ratio Calculation of Price-Earnings ratio Jaedan Industry Average Year 2009 2010 2009 2010 Current Stock Price 42.89 42.89     EPS 1.628819 6.1282     P/E ratio 26.331962 6.99879 5.41 5.97 2) Calculation of Market to Book Value Calculation of market to Book value Jaedan Industry Average year 2009 2010 2009 2010 Market Value per share 42.89 56.82     Book Value per share 8.5 8.5     Market to Book Value 5.05 6.68 4.19 4.32 Part B 5) Three Financial strengths and three weaknesses of Jaedan Financial Strengths: Debt Position: The debt position of Jaedan has improved in the year 2010 as compared to 2009. This shows that the ability of the company in repaying its debt amount has improved. Moreover, its debt has reduced as compared in the year 2010 as compared to 2009. The company is having its debt ratio lower as compared to the industry averages which show that it is in less risky position (Besley & Brigham, 2011). Thus it can be said that the debt position of Jaedan is even better than the industry averages. This also implies that the financial position of the company is improving. Profitability position: The profitability position of Jaedan has improved in the year 2010 as compared to 2009. The gross profit margin, operating profit margin and net profit margin of the company has increased in the year 2010 as compared to 2009. This shows that its earnings have improved. The net profit margin is one of the most important measurements of the long term value of Jaedan. Here, it is higher than the industry average which implies that it possesses the capability of earning good profit and achieving competitive advantage in the industry. Liquidity Position: The Company is in a good position when it is being analyzed by the current liquidity position. The current ratio of the company has increased from the year 2009 to the year 2010. This shows that it is using its current assets in very efficient way for repaying the short term liabilities (Hitchner, 2003). Current ratio determines the liquidity position of the company associated with meeting up of the short term liabilities. The current ratio of the company is higher than the industry average. Quick ratio of Jaedan is also higher in the year 2010 as compared to 2009. Quick ratio determines the extent to which the current assets of Jaedan (excluding the inventory) have been utilized for the purpose of meeting the current liabilities (Hitchner & Mard, 2011). Higher quick ratio of the company when compared with the industry average shows that it is utilizing the cash as well as other short term investments in efficient manner for decreasing its short term debt. This highlights the fact that it is performing in an impressive manner and strengthening its liquidity position in the market. Financial Weaknesses: Negative Free Cash Flow: Free Cash Flow is the amount of cash left with any company after meeting up all the expenditures. It can be seen that the free cash flow figure of Jardan is negative which implies that the company was unable to save cash after meeting up all the expenditures. This can be counted as one of the weaknesses of Jaedan. It should make attempts for having positive free cash flows which can be disburse as dividends to its shareholders. It should aim at generating high positive free cash flow for increasing its potentiality to make high investment and consequently earn high return in the future. Market Position: The Price-Earnings ratio determines the amount of return that the investors are expecting. The Price-Earnings ratio of Jaedan is much higher as compared to the industry average even though the ratio of the company has decreased in the year 2010 as compared to 2009. This shows that the price of the stocks of the company is high as compared to the industry average (Bragg, 2011). Moreover, the price earnings ratio has shown a huge variation within one year i.e. from 2009 to 2010. This shows that there has been a high fluctuation in the stock price as well. If the stock prices tend to fluctuate within the short term period then it becomes difficult to have an average common stock price. Thus the company should focus on reducing the price fluctuations in its stock prices. Interest Earned Ratio: The interest earned ratio of Jaedan has reduced in the year 2010 as compared to 2009. This ratio implies the ability of any company in meeting up the necessary interest payments (Stice, J. D. Stice & Swain, 2010). The ratio has decreased which signifies that the ability of the company to meet its interest expenses from the profit generated has decreased within one year. This might be a reason of dissatisfaction for the creditors resulting in losing their faith on the company. 6) Recommendations stating how Jaedan Management can improve upon the weaknesses The following recommendations will help the company in improving its performance and converting its financial weaknesses into financial strengths: Jaedan should try to increase its earnings and reduce its interest and other expenses to generate a good amount of positive free cash flows. This will help in improving the financial performance of the company. The company should try to reduce the fluctuations in its price earnings ratio for improving its position in the market. Moreover, it should try to bring the price earnings ratio figure closer to the industry average for improving the current state. Jaedan should improve its profitability position even more for meeting up the necessary interest expenses. This will help in increasing the reliability of the creditors, increase in the actual profit and finally the financial performance of the company. Reference List Besley, S., & Brigham, E. F. (2011). CFIN2 + coursemate printed access card. Connecticut: Cengage Learning. Bragg, S. M. (2011). The new CFO financial leadership manual. New Jersey: John Wiley & Sons. Hitchner, J. R. (2003). Financial valuation: Applications and models. New Jersey: John Wiley & Sons. Hitchner, J. R., & Mard, M. J. (2011). Financial valuation workbook: Step-by-step exercises and tests to help you master financial valuation. New Jersey: John Wiley & Sons. Stice, E. K., Stice, J. D., & Swain, M. R. (2010). Accounting: Concepts and applications. Connecticut: Cengage Learning. 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