Finance, Accounting Financial Statement and Cash Flow Analysis - Example

Finance and Accounting Financial ment and Cash Flow Analysis Jaedan’s Free Cash Flow The Free cash flow has been derived from the beginning by calculating the operating cash flow of the firm. The operating cash flow of the firm is calculated by adding Earnings before interest and tax to the Depreciation and then deducting the tax. The capital spending is then calculated by accumulating the ending value of the fixed asset and then subtracting the beginning value of the fixed asset then by adding depreciation to it. The net changing capital is calculated by deducing the change in ending current asset and current liabilities and then subtracting it by change in beginning values of the difference in current asset and current liabilities. Total free cash flow is then calculated by adding operating cash flow to capital spending and then deducting change in net working capital of the firm. The calculations done are provided below in the tables. Change in working capital 1881181.00 Capital expenditure 1881181.00 Operating Cash flow $1,322,151.03 Total Cash Flow from the firm ($2,440,210.97) Jaedan’s Liquidity . The liquidity ratios utilized here are the current liquidity ratio and the quick ratio. The current ratio actually tries to underline the liquidity of the firm. it helps the financial analyst to understand the leverage situation. Jaeden’s liquidity is calculated by calculating the liquidity ratios for the firm It also provides the information as to whether the firm is able to meet up its burden of short-term debt and liabilities. The current ratio is calculated by dividing current assets of the firm by current liabilities. Firstly, subtracting the current assets from the inventory and then dividing it by the current liabilities however calculate the quick ratio. The below provided table calculates the firm Jaeden’s liquidity ratios. Liquidity ratios 2009 2010 Current Ratio 2.65 2.27 Quick Ratio 1.84 1.65 The liquidity ratio also enables the creditors to assess the position of the firm before providing them credit period. The short-term creditors mostly look into a firm with high current ratio. This is because it enables them to mitigate their risk levels. However, this case may be different in the case of shareholders in which they prefer the firm’s current ratio to be low. This indicates to them that the wealth of the firm is actually growing. The main problem associated with the current ratio is that the inventory may comprise of many other items, which may require a longer time to liquidate. Therefore, the quick ratio is used as an alternative to the current ratio. The current assets included in the quick ratio include the notes receivable, other accounts, which are to be received, and the like. These mostly form current assets minus the inventory. The quick ratio is also sometimes termed as the acid test for the company. Jaedan’s Debt and Profitability Ratios The below provided tables underline the debt and profitability ratios of the firm. Activity Ratios 2009 2010 Inventory Turnover 8.41 0.64 Average Collection Period 27.13 471.28 Average Payment Period 39.82 748.07 Fixed Asset Turnover 0.31 3.5264 Total Asset Turnover 0.45 5.69       Debt Ratios     Debt Ratios 2.46 2.34 Assets-to-equity ratio 0.59 0.82 Debt-to-equity ratio 1.46 2.34 Times Interest Earned 26.33 10.00 Profitability Ratios 2009 2010 Gross Profit Margin 30.00% 37.00% Operating Margin 25.59% 17.91% Net Profit Margin 16.25% 10.64% Earnings Per Share 6.27 0.45 Return on Total Assets 36.33% 1.87% Return on Common Equity 11.17% 11.17% The debt ratios are also called the financial leverage ratios of the firm and it indicates the ability of the firm to service debt. The debt ratio of 2009 shows that firm was in a stable position. The firm was able to meet its debt with its assets. The 2010 debt ratio shows the firm to be in an advantageous position. If debt to equity ratio is more than one as in the case of Jaeden then the implications are that most of company’s workings are financed by debt. An asset to equity ratio is less than one means that mostly the assets owned by the company are on debt and they are not a part of equity. The profitability ratios are named as the profit margin ratios. They help in comparing the profit margin of the company with the revenue produced by the company. They give the analyst an idea as to what is the company’s income comprises. The gross profit margin has although increased all the other profit margin has decreased. However, we can see that the company has increased its debt to a high extent, which might affect the solvency of the firm. Jaedan’s Market Ratios The market ratios help us to assess the situation that the firm is facing. The market ratio uses the market value of the shares and the book value of the shares, which have been written down in the books of the company. The price earnings ratio tries to show if the shares of the company are properly valued. If the market or the industry price is lower than the shares of the company then the shares of the company is overpriced and vice versa. We find that in this situation of Jaedan the price of the shares in 2010 is over priced in comparison to the market value of the industry shares. Therefore, this reflects that the health of the company is not stable. Market Ratios 2009 2010 Price/earnings ratio 6.84 127.14 Market/book ratio 10.72 14.21 Jaedan’s Income statement for 2010. The income statement of any company gives the clear picture of the financial statements of a company. It actually tries to underline the performance of the company during a certain period by calculating the gross profit of the company, operating income of the company, net income of the company and by calculating earnings per share. The basic items of the income statement are revenues, gains of the company and the expense incurred by the company. The below provided table underlines the income statement of the company Jaedan for the financial year 2010. Income statement of 2010     Sales 4200000.00 Less: Cost of Goods Sold 2646000.00 Gross Profit 1554000.00 Less: Operating Expense, Selling, general and administrative expenses $1,621.00 Depreciation $800,000 Earnings Before Interest & Taxes 752379.00 Less: Interest Expense 75237.90 Earnings Before Taxes 677141.1 Less: Taxes 230227.97 Net Income 446913.13 Less Dividends paid 1008000.00 To retained earnings -561086.87 Jaedan’s balance sheet for 2010 The balance sheet is the statement of financial position of the company, which gives a detailed account of the assets, liabilities and the equities of business. It is actually an advance form of equation of accounting which tries to equate assets with the sum of liabilities and equity. The balance sheet of 2010 is provided below. Jaden Industry Balance Sheet 12-31-2010 Assets   Liabilities and Equity   Cash 3689000.00 Accounts Payable 5423000.00 Marketable Securities 1836000.00 Notes Payable 706000.00 Accounts Receivable 5423000.00 Accruals 500000.00 Inventories 4118000.00 Total Current Liabilities 6629000.00 Total Current Assets 15066000.00 Long-Term Debt 3046000.00 Fixed Assets 14811000.00 Preferred Stock 100000.00 Less: Accumulated Depreciation 5960000.00 Common Stock (at par) 4000000.00 Net Fixed Assets 8851000.00 Paid-in Capital In excess of par 4500000.00 Total Assets 23917000.00 Retained earnings 11016281.00     Total Liabilities and Equity 22662281.00 Jaedan’s statement of Retained earnings Statement of Retained earnings of 2010     To retained earnings $4,693,731 Net Income 6268975.00 Dividend paid to share holders 1575244.00 Retained earnings of 2010 9387462.00 Jaedan’s Statement of cash flows for 2010 A cash flow of a company helps in summarizing the cash flows of the company, which has taken place during a certain accounting period. It classifies the cash flows of the company under three names such as cash flow resulting from operating activities, cash flow resulting from financing activities and from investing activities (Drake). Any investor should carefully look into the cash flow statement of accompany before investing in the company because this provides the actual picture of the earnings and the expenditure of the company which may not be reflected properly in the income statement of the company. The cash flow prepared here reflects negative cash from the activities, which shows that actually the financial health of the company is not in a actually good position. Cash Flow Statement For the year ended at 2010 Net Income 446913.13 Depreciation 800000.00 Increase in accounts payables 2477000.00 Increase in accruals 150000.00 Usage of cash   Increase in accounts receivables 2555500.00 Increase in Inventory 908000.00 Cash flow from operations 410413.13 Increase in equipment 2932000.00 Cash flow from investing activities -2521586.87 Notes Payable 22000.00 Cash Flow from financing activities -2499586.87 Net Change in Cash -2499586.87 Jaedan’s Du Pont Analysis Du Pont Analysis For year 2010 Du Pont analysis(Jaeden) 0.50 Du Pont Analysis (Industry) 0.54 The Du Pont analysis actually investigates a company’s return on equity. It tries to prove that a company is able to gain a high return on equity if it has a high net profit margin along with its effective utilization of assets and a high financial advantage (Drake). It helps in comparison of the company with the industry because it effectively shows up the breakup of the net profit margin, asset turnover and the financial advantage. Here the Du Pont analysis has marked out that Jaedan is falling behind the industry standard as we can see that net profit margin of Jaedan is less in comparison to industry, all the other factors too are less in comparison to industry except for Total asset turn over which in 2010 was higher in comparison to the industry. The table given below shows the comparison clearly. Jaedan’s position:- 2010 2009 Net Profit Margin 10.64% 16.25% Total Asset Turnover 5.69 0.45 Assets-to-equity ratio 0.82 0.59 Industry Position:- 2009 2010 Net Profit Margin 15.11% 17.97% Total Asset Turnover 2.14 2.33 Assets-to-equity ratio 165.82% 163.13% Three Financial Strengths and Three Financial Weaknesses We can compare the firm’s debt, profitability, and liquidity ratio with the industry ratios to find the financial strength and weakness of the firm. The current ratio of the industry is quite high in comparison to the firm (UVU). In addition, although the firm shows an inclination toward debt the industry is showing the inclination toward issue of equity shares. It could mean two things that the firm has the ability to service debt therefore it shows an inclination towards it. We can also state that although the firm has a high amount of debt yet its liquidity position is quite stable, which means until now it, is able to service its debt properly. We also find through the DuPont analysis that the firm has a bad condition in financial position in comparison to the industry standards because it is 0.04 less than the industry standard. We also notice that the price of the shares of the companies in over valued in comparison to the industry standards. Three Financial Strengths The three financial strength of the firm are- High liquidity ratios- The high liquidity ratios mean that the firm has ability to service debt. We find that the gross profit ratio is higher in comparison to industry standard. Debt quantity is higher than the equity of the firm, which means the firm has a higher advantage than the industry, which mostly deals in debt. Three Financial weaknesses We find that although the Net income in the income statement is showing a positive answer the investors should invest in a company by judging the cash flow statement of the company. It can be seen that Jaeden is suffering from negative cash flow from the cash flow statement. Jaeden as a company utilizes debt to much, which might lead to its bankruptcy. Jaeden’s Du Pont analysis also reveals that it is less from the industry standards although not so much less. Success factors. The success factors of Jaeden is that although it utilizes debt heavily yet its liquidity is quite high which means that it has a good credit service and a good debtor service. This can be reflected from the table provided below. Activity Ratios 2010 2009 Inventory Turnover 0.64 8.41 Average Collection Period 464.83 26.76 Average Payment Period 737.82 39.27 Fixed Asset Turnover 0.3147 3.25 Total Asset Turnover 0.20 2.24 The table shows that the average collection period is quite faster than the average payment period, which contributes to the success of the firm. Therefore, the firm continues to heavily rely on debt. Recommendations to Improve Financial Weaknesses Although it can be seen, that Jaeden continues to utilize its creditors and debtors by heavily relying on debt to increase its leverage and to continue its day to day financial activities, we find that the operating profit and the net profit margin is decreasing constantly year by year. This can be attributed to the use of constant heavy debt by the firm. Therefore, the firm should consider other methods for borrowing or acquiring the capital than debt. If the firm continues to keep on relying on debt heavily then the firm might face bankruptcy in the end. The firm may even defer unnecessary capital expenditure; sell discarded assets and even rearrange the loan repayment schedule to improve its financial condition. The more sales may also be an option to the firm to acquire more revenue. If the firm acquires more revenue, then it would be able to meet and repay its existing debts easily. The firm should also try to improve its credit period by increasing the debt collection and by reducing the time in which the debt is collected from the debtors. References Peterson Drake, P. (n.d.). Financial Ratio Analysis. James Madison University. Retrieved 22 July 2014, from http://educ.jmu.edu/~drakepp/principles/module2/fin_rat.pdf Peterson Drake, P. (n.d). Financial Ratio Formulas. Ohio University. Retrieved 22 July 2014, from http://www.ouwb.ohiou.edu/stinson/Classes2009/fin_formulas.pdf UVU.(n.d.). UVU. Retrieved 22 July 2014, from http://research.uvu.edu/management/mcarthur/Boilerplate/FinanceRatios.pdf Read More