Financial Statement and Cash Flow Analysis - Assignment Example

Part A a) Free Cash Flow of Jaeden Industries Free cash Flow ment Operating Activities           Amount in $ Amount in $ Net income     6268975 Adjustments to reconcile net income to net cash   Accounts Receivable decrease   2555500   Accounts Payable increase   190000   Depreciation   800000 3545500         Net cash flow from Operating activities     9814475 Investing activities               Debt     -3046000         Net cash flow from investing activities     -3046000         Financing activities     10228819         Net increase in cash equivalents     4136819 Cash equivalent at the beginning of period     871319 Net cash flow at the end of period     5008138 The table above denotes the cash flow statement of Jaeden Industries, which determines free cash flow of the company. It is noticed that net cash flow at the end of the period is quite satisfied for the year 2010. The company has been incurring a satisfied cash flow, which they can utilize in extension of the company. b) Jeaden’s Liquidity Ratios Jaedens’s Liquidity Ratio Industry Liquidity ratio Current Ratio 2.65 3.26 Quick Ratio 1.84 2.19 Accounts receivable turnover ratio 10.13 Average collection period 36.02 36.17 Inventory turnover 7.22 6.59 Days sales in inventory 50.54 Inventory to net working capital 0.63 The above table denotes liquidity position of the company. The following are deducted from the figures obtained after calculation: 1) The current ratio of Jaeden Industries is lower than that of the industry ratio. The current ratio identifies the ability of the company to pay back its short-term liabilities by short-term assets (Hoofman, 2009). Though current ratio of the company is lower than the industry, yet it has the capability to pay off liabilities in the short run with the help of short-term assets. It is also evident that the company can work upon its current liability, so that the current ratio can come in close proximity to that of the industry. 2) The quick ratio identifies ability of the company to pay back its short-term liabilities from liquid assets that they possess. With higher quick ratio, liquidity position of the company gets better. The quick ratio of Jaeden indicates that the company has the ability to pay back short-term liabilities from its liquid assets, since value of the ratio is greater than 1. However, the company should concentrate on increasing current asset, so that they are capable enough to match with the industry ratio (Jennings, 2006). 3) The average collection period of the company and the industry are in the same line, which denotes that the company gives the same amount of time to debtors to pay back the debt, as the industry (Albrecht, 2011). 4) Inventory turnover ratio of a company shows the number of times that the company’s inventory are sold and then replaced by new products, so as to fill up the same. It is observed from the inventory turnover ratio of the company and the industry that the former is selling their products 7 times faster than other companies in the industry. Thus, it can be inferred that the company is performing well, as far as sales is concerned and the company’s products have huge demand (Warren , 2009). c) Leverage or debt ratio Ratios Jaedens’s Solvency Ratio Industry Solvency ratio Debt Ratio 0.41 0.39 Times interest earned- income 26.33 Times interest earned - cash flow (interest coverage) 27.86 16.81 Total asset to equity 1.49 16.3 Total liabilities to total assets 0.41 Total liabilities to equity 0.83 The above table denotes profitability ratio of the company and the industry, which indicates the following: 1) The debt ratio denotes the degree of leverage of the company. A higher debt ratio denotes that the company is prone to financial risk. This ratio varies widely across industries. The debt ratio of the company suggests that it is prone to financial risk, as compared to other companies in the industry. This can be so inferred, since debt ratio of the company is greater than that of the industry. 2) Times interest earned - cash flow denotes the ability of the firm to pay back the interest on outstanding debt of the company. The above figures of the company and industry indicate that the former has higher ability to pay off interest on outstanding debts. 3) The total asset to equity of Jaeden and the industry denote that the company has lower total asset as compared to other companies in the industry. Profitability Ratio Ratios Jaedens’s Profitability Ratio Industry Profitability ratio Return on assets 38.8% Return on equity 200% Gross margin 30.0% 23.74% Operating margin 25.6% 20.89% Profit margin 16.3% 17.97% Total asset turnover 2.39 Fixed assets turnover 2.89 Current asset turnover 3.01 The above table denotes profitability ratio of the company and the industry. The following can be deduced, after drawing a comparison between the two: 1) The gross margin of the company is higher than the industry, which denotes that the former is performing with respect to other companies in the industry. Sales of the company are higher than other competing companies in the industry. 2) The profit margin of the company is lower than that of the industry, which suggests that other companies in the industry are earning more operating revenue than the company. Market Ratio The market ratios are calculated in order to get the value of the company and to understand how investors evaluate the company’s financial status. The investors are concerned about investing in the right stock as that enables them to earn a profitable amount. The market ratios actually evaluate market price of the share of the stock that is provided by the company. Few of the market ratios are calculated for Jaeden Industries: Ratio Values Price to earnings ratio 9.83 Dividend yield ratio 5684 Cash flow ratio 2.4 Price to book ratio 26.46 Price earnings ratio = Price per share/ Earning per share Dividend yield ratio = Annual dividends per share/ Price per share Cash flow ratio = cash flow from operation/ Current liabilities Price to book ratio = Price per share/ Book value per share Part B The strength and weakness of a particular company is dependent on their financial status, company reputation, sales revenue and also, external factors, like, economic, political and social aspects. The financial status of the company depends on the debt ratio to a great extent. If the debt ratio increases, it indicates that the company can face financial risk in future. Other than debt ratio, the current ratio also measures the liquidity of the company, which is whether it is capable of paying off its long and short-term liabilities. The three weakness and strengths that can be determined from the analysis are as follows: Strengths 1) The company has sufficient cash flow at the end of 2010, which denotes enough cash balance to fund its future development. 2) Jaeden has a greater potential than the industry to pay off its interest on outstanding debt. 3) The gross margin of the company is higher than that of the industry. Weakness 1) The debt ratio of the company is higher than that of the industry it is indicated of th4 fact that Jaeden is prone to financial risk since the total liabilities are greater than that of the total assets. 2) The profit margin is also lower than other companies in the industry, which suggests that the company has higher expenditure than the others. 3) The company possesses lower total asset to equity ratio, which indicates that the company has lower asset base with respect to equity. Recommendations There are many financial risks that threaten companies to a large extent. The threats are to be dealt with great care, since a wrong decision can render a company bankrupted. The following are the ways of improving the financial status of the company, which are relevant for Jaeden Industries too: 1) The total asset of the company should be improved. It is noticed that there has been sharp decline of total asset in 2010 from 2009. The company should reduce the inventory through sales and bring in cash. The company should invest in more and more market securities so that they get increased return in future. If total asset increases, the total asset to total liability will also decrease which indicates that the company is in a stable position and has enough asset to pay off the liabilities. The decrease in the debt ratio will also indicate that the company is free from any financial crunch in future. 2) The company can make investment in purchasing more land and equipments which will help them to expect for good future return. 3) Jaeden can improve its profit margin by concentrating on expenditure of the company; expenditure of the company is higher than the others in the industry. Despite a higher gross margin, the company is unable to earn higher profit margin than the industry average. 4) The company should concentrate on issuing more shares so that they get more investors. References Albrecht, W. (2011). Financial accounting. New York: South-Western Cengage Learning. Hoofman, G. (2009) . Financial accounting. Boston: Houghton Mifflin Company. Jennings, R. (2006). Financial accounting. Singapore: British Library Cataloguing-in- Publication Data. Warren , C. (2009). Financial accounting. New York: South-Western Cengage Learning. Read More