Financial Structure the Overall Financial Structure of Essay
- Length: 10 pages
- Sources: 4
- Subject: Economics
- Type: Essay
- Paper: #45195886
Excerpt from Essay :
The overall financial structure of JP Kenny Limited can be analyzed from the viewpoint of time duration, which includes short-term and long-term funds.
Debt- Equity Ratio
This ratio analyses relationship between borrowed funds and JP Kenny's capital. It is indicative of reflective claims of the creditors and the shareholders against JP Kenny's assets. Here analysis of the long-term Equity ratio and total equity ratio will be made.
Long-Term Debt -- Equity Ratio
This ratio establishes the relationship between long-term outside liabilities and JP Kenny's funds. It shows the proportion of the External and Internal Equities. The long-term debt for 2010 was 1, 138,000 pounds and the equity shareholder was 8, 885,000 pounds giving a 8:1 long-term debt equity ratio. This shows that creditors of JP Kenny have a larger claim than the shareholders, therefore it can be construed that JP Kenny will deal with stringent conditions from lenders, while borrowing money.
Total Debt-Equity Ratio
This includes all the debt from creditors against JP Kenny's claims preference shares equity shares, capital reserves, retained earnings among other items. In 2009, total debt was 17, 626,000 pounds while shareholders equity was 6, 940,000 pounds giving a ratio of 0.4: 1. In 2010, total debt was 17,855,000 while shareholders equity fund was 9,990,000 giving a ratio of 0.6:1. The ratio indicates an increased trend for the two years.
The increasing trend indicates that JP Kenny for the two years has depended upon borrowed capital. It also shows that for every 0.6 pounds of outside liability in 2010, JP Kenny has 1 pound of shareholder capital.
Debt - Asset Ratio
This ratio measures the extent to which the assets of JP Kenny are supported by borrowed funds. Here, the total debt is compared to the total assets. In 2009, JP Kenny's total assets were 7, 269,000 pounds and the total debt was 17, 626,000 pounds, therefore the ratio was 0.41: 1. Subsequently in 2010, the total assets were 10, 195,000 pounds while the total debt was 17,855,000 giving a ratio of 0.6:1. This showed an increased trend over the two years with 0.41 times in 2009 as compared to 0.6 times in 2010.
The average Debt- Asset ratio of 0.6 in 2010 indicates that for every 0.6 pound of outside liability, JP Kenny has 1 pound of total asset. This indicates that the shareholders are deprived the benefits of equity trading, the management did not exploit the debt. However, the increasing trend shows that the company has been increasingly financing the total assets from outsiders' money over the two years.
The liquidity ratio estimates JP Kenny's ability to repay short-term creditors and is a measure of the company's financial strength. In addition, if the value of the firm's liquidity ratio is greater than 1.0, then the creditors are fully covered. JP Kenny's liquidity ratio is given as liquid assets divided by short-term liabilities. Liquidity ratio is used to measure different types of assets.
This ratio is used in measuring JP Kenny's liquidity by deriving proportion of assets to cover current liabilities of the company. The evaluation of JP Kenny's current ratio may be misleading since chances of JP Kenny's liquidating assets to meet liabilities are limited. The current ratio of JP Kenny shows the firm's ability to meet its short-term liabilities using the short-term assets.
JP Kenny's current ratio during the year 2009 was 1.4. This ratio is an indicator that the company is able to meet its debt problems. The share at 1.4 indicates that the company is able to satisfy its short-term liabilities by using their short-term assets.
In addition, JP Kenny's current ratio rose to 1.6 during the year 2010. This ratio shows that the current assets exceed the value of current liabilities. This ratio, which is more than 1.5, is recommended for the company as it illustrates JP Kenny's ability to meet debts using their assets. This ratio greater than 1.0 means the company does not have liquidity issues. This current ratio in addition, shows that the firm's money is tied up in current assets.
JP Kenny's quick ratio measures the liquid current assets and excluding inventories but includes account receivables and certain investments made by the company.
JP Kenny's quick ratio during the year 2010 stood at 1.2. The firm's quick ratio which was more than 1.0 means the company is having little problem with liquidity. The higher the ratio, the more liquid the company is, and is better placed to ride out of possible economic downturn in its business. In addition, the quick ratio of 1.2 indicates that the company's quick assets exceed current liabilities. In addition, having a quick ratio of more than 1.0 suggests that the company does not have potential stockholding problems.
The cash ratio of JP Kenny estimates liquidity by evaluating amounts of cash, cash equivalents and invested funds available to meet the firm's short-term liabilities. The calculation of JP Kenny' cash ratio takes in consideration assets that are liquid, ignoring assets such as receivables and inventories.
The year 2009 saw JP Kenny's cash ratio stand at 1.4. This cash ratio means the company investments and cash equivalents outweigh the liabilities. This ration illustrates the company's ability to pay creditors and maintain a better financial shape.
In addition, during the year 2010, JP Kenny's cash ratio was at 1.6; indicating an increase in investments and cash equivalents. This high cash ratio means the company is in better financial status than the year 2009. Additionally, the high cash ratio suggests that JP Kenny is able to pay its creditors.
To analyze profitability of JP Kenny the profitability ratios will be necessary. This ratio will indicate overall efficiency and performance. The ratio will be further divided into margins and returns.
In 2009, JP Kenny's gross profit was 14,265,000 pounds while the net sales were 33,000,000 pounds giving a gross profit margin of 43%. In comparison, in 2010, the company's gross profits were 10,261,000 pounds while the net sales were, 39,000,000 pounds giving a gross margin of 26%. The company performed better in 2009 as compared to 2010.
In 2009, the company's Earnings Before Interest and Taxes (EBIT) were 10,313,000 pounds while the net sales were 33,000,000 giving an operating profit margin of 25%. In 2010, the EBIT was 6, 142,000 pounds with net sales of 39,000,000 pounds giving an operating profit of 16%. The overall operating efficiency was high in 2009 as compared to 2010.
In 2009, JP Kenny's net income was 8,479,000 pounds while the net sales were 33,000,000 pounds giving a net profit margin of 21%. In comparison, the company performed poorly in 2010 with net income of 5,761,000 pounds and net sales of 39,000,000 giving a lower percentage of 14% in net profit margin.
In 2009, the net income was 8,479,000 pounds against assets of 7, 269,000 pounds. This gave a ratio of 1.2:1. In 2010, the net income 5,761,000 pounds against assets of 10,194,000 pounds giving a return on asset ratio of 1:1. It is evident that the efficiency with which JP Kenny is managing the investment in asset reduced by 0.2 from 2009 to 2010.
In 2009, the net income of 8,479,000 pounds against shareholders equity of 6,086,000 pounds gave a return on equity ratio of 1.4:1. In 2010, the net income of 5,761,000 against shareholders equity of 8, 885,000 pounds gave a return on equity ratio of 0.65:1. The return on shareholders' money was double in 2009 as compared to 2010.
Cash Return on Assets
In 2009, the cash flow from operating activities was 10,313,000 pounds against total assets of 7, 269,000 pounds giving a ratio of 1.4:1 on cash return ratio. In 2010, the cash flow from operating activities was 6,142,000 pounds against total assets of 10,194,000 pounds giving a ratio of 0.6:1 on cash on return ratio. Cash return on assets was better in 2009 as compared to 2010.
Efficiency and Use of Resources
Estimation of JP Kenny's efficiency ratios measure the quality of the firm's receivables and how JP Kenny uses and controls its assets. In addition, the calculation of efficiency ratio of the company determines how the company pays suppliers, overtrading and under trading on equity. The estimation of JP Kenny's efficiency incorporates the use of five ratios in measuring this efficiency.
Sales to Inventory Ratio
JP Kenny's sales to inventory ratio is a tool for comparing stocks to sales ratio of the business with other competitors in the market. This ratio is estimated by dividing the sum of annual net sales of the firm by the inventory
The company realized sales to inventory ratio of 0.7 during the year 2009. This low ratio was an indicator of obsolete and stagnant inventory managed by the organization.
The company in addition, had 0.8 sales to inventory ratio during the year 2010. This low ratio is a good indicator as far as sales are concerned. The low sales to inventory ratio shows that JP Kenny had…