Financial Statement Analysis - David Jones - Case Study Example

David Jones limited Executive summary The trend of market share needs one to have the knowledge of financial analysis. This is an important tool as it provides with information regarding financial situation, the liquidity of the firm, the risks involved and capital resources.                             Equity investments normally refers to the buying and holding of shares of stock on a stock market by persons and firms in expectation  to have income from dividends and may be capital increase as the value of the stock increases. As an investor one should have the knowledge of supply chain management and credit appraisal.          David Jones is a retail company that was formed in 1838 at Sydney, Australia by David Jones. It deals with cosmetics, fashions, furniture, electrical s and food. By 2007 it had achieved revenue of Au$1.98million addition its total equity by 2009 was Au$687.7million. Cash flow                      To get profits normally does not necessarily mean being liquid as a company can fail because of a inadequate cash, even while profitable. It also servers as another way of measuring business profits when it is known that accrual accounting concepts do not configure with economic realities. David Jones cash flow statement provides information on the liquidity and the ability to change cash flows. As argued by Peter & Eddie (2000, p.78) cash flow statement gives extra information on evaluating assets, liabilities and equity. The embracing of cash flow statement is basically because of the removal of allocations which can be gotten from various bookkeeping methods. The debt was paid down through a combination of cash flow provided by operating activities and investment maturities. The cash flows include operating flow, investmentflow and financial ash flow.                   It has s clearly indicated that the assets, liabilities as well as the ownership equity are well stipulated and give the company a good position of performance. There was an increase in cash flow attributed to change in accounts receivable due to the timing of sales and customer payments.Inventiry increased due to the addition of one item in the supply chain. The string of financial condition in which company entered 2009 coupled with profitable operations during the year enabled the company make the largest acquisition. Debt was paid down through a combination of cash flow provided by operating activities and investment maturities. The cost of goods sold increased from       1800000 to1985490        due to lower margins on aired brands,loweer production volumes in several core lines. Selling marketing and administration expenses increased as a % of 20.4 from 19.8 in 2009 Other income increased 1199344       due to lower interest expense and higher investment earnuings.The consolidated effective tax declined from 33%-32% reflecting on a reduction in foreign income tax. Net sales were 1199344      compared to 1268227 in the previous year. Costs of goods sold as a % of net sales was 56.7.The high cost for the principle ingredients and increased firm overhead cost incurred during last year were generally offset by selective price increase .Gross margin  were lower in  the second half of the year due to seasonality and corresponding variation of product mix.  Income statement 2009 (000$) 2008(000$) Revenue for sales of goods                              985490               8000000 Cost of sales                                                    1199344          1268227 Gross profit                                                 786146829               772786 Other income                                                264538                               107517 Employee benefit expert                                338892                347460 Depreciation and amortization expenses              43979          41544 Advertising                      45521                             54439 Net financing expense                        3 9243                      41178 Other expenses                                       18670                    38119 Profit before income tax                       217432                   209615 Income tax expense                                     60910                      623239 Profit after expense c                                         1565222                    147286 Basic earn per share                                   31.5                30.6 balance sheet assets Inventory                          244843                  257288 Other current assets          49136              490017 Property plant and equipment            724080            670687 Other concurrent assets                      109158                  111653 Total assets                                 1127217                1529645 liabilities creditors                244102              274608 provisions                   58905                    61635 Interest bearing liability             101870                512360 other liabilities                        3495561                 32000 Total liabilities                439832            909855 Net assets                      687385                    619790 Financial ratio analysis 1.         Long -term solvency or Gearing Ratios They are used to evaluate long-term solvency of firms a.      Times interest earned ratio This ratio indicates the ability of the business to finance interest charges on long-term loans. =It is given by Profits before interest and tax divided by Total interest charged 8,292/1,136 =7.23   2.      Short-term liquidity or the liquidity ratios It is the ability of a firm to settle its obligations or debts otherwise it will be insolvent or illiquid.  The above chart shows a liquidity ratio for David Jones a.      Current ratio It shows the number of times the current assets can cover the current liabilities. The ratio 2:1 is desirable It is given by;                           Total Gross Current Assets Current Ratio = ____________________ Total current liability 1127217 =2.56 439832 The high ratio indicates the firm may be having so much cash at hand that they are not using it wisely to invest.  Quick ratio It shows the number of times the relatively liquid current assets can cover the liabilities. The ratio 1:1 is desirable It is given by; Current assets less stock and then divide by current liabilities 14,932-4,889= 10043 10,043/9,429 = 1.1 According to the quick ratio of David Jones Group, the group is able to cover its liabilities and so it is in a stable financial position with a good performance and this also shows that it not facing a business risk. As noted by Peter & Eddie (2000, p.78) the VU bank which is a potential creditor will use this ratio in establishing the company's capacity to forfeit off under the worst probable situations. 3.         Efficiency Ratios They are used to indicate the vigorous with which the business is running its operations. It indicates the business performance     a.      Debtors turnover It shows the number of days it takes the business to collect cash from the credit customers after making a credit sale. (Vincent, Sathye $ Boffey 2003, p. 67) The lesser the number of days, the more efficient is the debtor policy. It is given by: Debtors multiplied by 365days and then divide by the amount of credit sales   4447 * 365= 16233155/44,036 =36.9 or 40 days b.      Creditors turnover It shows the number of days it takes the business to pay supplies after purchasing goods from them on credit. It is given by: Creditors * 365 days divided by credit purchases 5,759 * 365=2102035/4,889 = 429.952   c.       Stock turnover It is the number of times it takes to realize stocks in a year. It is given by: Cost of sales divided by average stocks or inventory         13181/6591 = 2.0   4.      Profitability ratios Are used to measure the profitability of the business. The higher the ratio the better for the business a.      Gross profit margin Shows the amount of gross profit earned in every $100 of sales It is given by Gross profit divided by sales 7,506/44,036=0.17the black intersection of profit and sales gives the profit margin as shown by the above graph.   b.      Net profit margin It is given by Net profit after sales divided by sales 5,784/44,036=0.13 The black area shows the intersection between sales and the net profit which gives the net profit margin. The profitability ratios of David Jones Group show that the company’s performance is low and hence in an unstable financial position. They are used to help the company on determining on how to invest. As a credit analyst for David Jones Group I would use the liquidity ratios .This is because they show the ability of a firm to settle its obligations. If a firm is unable to settle its debts then it can be declared bankrupt or insolvent. David Jones group has a current ratio of 2.56 which is equivalent to 3 and a quick ratio of 1.1 which is equivalent to 1.This ratio show that the firm is at a good position to cover or pay for its obligations and therefore as a lender I will be in a position to lend the firm some cash. I would also use profitability ratios to determine its financial position before lending it money. (Vincent, Sathye $ Boffey 2003, p. 89)  In this case David Jones limited has low profitability margins. The ability of a firm to pay for its loans depends on the profit made but this firm seems to be making low profits and therefore as a credit analyst I would consider their low profit as leading to low performance and hence withhold credit from them. A Financial risk is a risk that a company will not have enough cash flows to meet its operating expenses. A Business risk is an inherent risk of operating a business and it represents a firm’s uncertainty of return on its assets. A business risk can also be accidental which occur naturally and are not part of the core of the business. David Jones limited is going through a financial risk since its cash flow is 13,224 unlike its obligations which sum up to 51,311 hence unable to meet its obligations. (Vincent, Sathye $ Boffey 2003, p. 77)This firm is also facing a financial risk since it is unable to meet its obligations and also goes ahead to get interest payable credit.                David Jones is not undergoing a market risk. Being a iron ore producer, getting credit will help it increase it production and hence it sales and this will make the firm to perform in the market .The risks will help David Jones company in determining the probability that there is a threat or the probability that there are vulnerabilities as well as the potential impact of the business Fixed assets analysis Fixed assets are one of the most important assets that a firm holds, as they represent major investments of financial resources. It usually composes of the majority of a business's total assets. The wise allocation of resources to meet a firms land, facility, and large equipment needs can bring its assets that will act as cornerstones of purposefully operation for years to come. On the other hand, a company engulfed with substandard fixed assets will find it hard to be successful. This applies normally in small businesses that have a smaller margin of error. This "Decisions can set the stage for future success—or failure of a company,"  (Simini,2004). This is to counteract the ever rising inflation” in the years to come." This is because competing firms that enter the field in the years to come will normally be forced to pay higher initial prices and higher financing costs expenses  for the same type of asset. The    Capital expenditures (CAPEX) are normally expenditures which forms future benefits. When the business buys fixed assets with a gainfully life that extends past the taxable year. Hedging is a method that tries to reduce risk. Regarding this, derivatives can be considered as a form of insurance. Derivatives usually allow risk about the price of the under said asset to be carried on from one party to another. It evaluates a variety of characteristics of the transactions including probability that anticipated transactions will occur. Derivatives instruments are accounted in the cash flow hedges and are recorded on the balance sheet for fair value.  References Douglas H . The Failure of Risk Management: Why It's Broken and How to Fix It, John Wiley & So Sathye M, Bartle J, Vincent M, & Boffey R: Credit Analysis & Lending Management; Wiley; ISBN 0-470-80041-0, 2003       Pat C, Dangerous business: the risks of globalization for America.  Alfred A. Knopf, 2008 David Jones “financial annual report” Financial statements march 2009   Read More