Financial analysis of JP Kenny Limited's debt and liquidity ratios
This paper is an analysis of the results of JP Kenny highlighting trends in performance applying appropriate and relevant ratios and analysis techniques. It includes financial structure, liquidity, performance – profitability and efficiency. The paper also identifies and examines a month-by-month budget, cash flow forecast, income statement and balance sheet of a project associated with the organization.
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Financial Structure
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.
Liquidity Ratios
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.
Current Ratio
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.
Quick Ratio
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.
Cash Ratio
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.
Profitability
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.
Margins
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.
Returns
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 good product sales in the market and maintains a steady market position. In addition, this low ratio is an indicator that the company is well stocked and potential customers are buying from the organization. Finally, the low ratio shows that inventories are not well managed and may be obsolete and stagnant.
Sales to Net Working Capital Ratio
This ratio estimates the number of times working capital turns over annually in relation to net sales of JP Kenny Ltd.
JP Kenny during the year 2009 had sales to net working capital of 0.74. The company additionally had a ratio of 0.8 in the financial year 2010. These were indicators that the business was trading well in the market; having excessive sales volume in relation to the investment in the business. This additionally indicated that JP Kenny was relying on debtors and assets to finance the operations of the business.
Accounts Payable to Sales Ratio
The accounts payable to sales ratio of JP Kenny measures how the company pays suppliers in relation to the sales volume annually.
The company realized accounts payable to sales ratio of 0.44 during the year 2009, which was an indicator of healthy business growth. This in addition, was an indication of use of available assets to fund the financial operations of the business.
In addition, JP Kenny Ltd. had a slight increase of this ratio to 0.45. This low ratio indicated that the company had healthy growth in financial operations. Furthermore, this low percentage of the accounts payable to sales ratio indicates that the business is using accrued debts and assets as opposed to suppliers to help fund daily business operations.
Task Two:
Break Even Point Quantity of Output Analysis
JP Kenny's Break-even point (BEP) is the point where cost or additional expenses and revenues received by the firm are equal. The break even of the organization is calculated by getting the difference of selling price and variable costs and dividing by the total fixed costs.
JP Kenny's fixed costs for the year were 404,400 against a selling price of 2,876,378.84 and variable costs of 990,270.31, which made the company, realize a Break Even of 0.2144. This Break Even Point shows that JP Kenny Ltd. has made more profits than losses leading to an imbalance in JP Kenny's expenses and revenues.
Variable Costs
Salaries - 468,000
Taxations - 69,028.87
Administrative Expenses - 17,766.30
Repairs and Maintenance - 32,305.75
Sand Molds - 365,913.65
Electricity - 37,255.74
Total Variable Costs = 990,270.31
Fixed Costs
Equipment Financing - 335,400
Rent - 65,000
Total Fixed Costs = 400,400
Break Even Point = Fixed Costs
Selling Price - Variable Costs
Break Even Point = 404,400
(2,876,378.84) - (990,270.31) = 1,886,108.53
Break Even Point = 0.2144
Margin of Safety
The estimation of JP Kenny's margin of safety index shows the company's strengths and weaknesses in the market. In addition, the margin of safety shows the amounts gained or lost and whether the company is over or below the Break Even Point. JP Kenny's margin o safety thus is calculated by getting the difference between break-even output and current output.
The company's current output from the cash flow was given as 2,876,378.84 while the break-even output was estimated at 1,886,108.53 giving a margin of safety of 988,270.31. This margin of safety showed the company's ability to make a great impact in the market.
Margin of Safety = (Current Output -- Break Even Output)
Margin of Safety = (2,876,378.84-1,886,108.53)
Margin of Safety = 988,270.31
Statement of Operations
Total Revenue 15, 869, 192.64
Cost of Goods Sold 3, 826, 278.84
Gross Profit 12, 042, 913.8
Operating Expenses
Wages & Salaries 468,000.00
Tax & Insurance Costs 69,028.87
Administrative Costs & Office Supplies 17,766.30
Repairs & Maintenance 32,305.75
Rent 65,000.00
Equipment Financing (Vulcan Mold Maker) 335,400.00
Electricity 37,255.74
Raw Materials (Sand Molds) 365,913.56
Total Operating Expenses 1,390,670.22
Operating Net Working Profit 10,652,243.58
Income before Taxes (EBT) 11,973,884.93
Taxes 69,028.87
Net Income Profit 2,435,608.62
Task Four:
Five Years Cash-flow Projection
Year 1
Year 2
Year 3
Year 4
Year 5
Start-up
(Euros)
(Euros)
Opening Balance (C/F)
12,039,948.79
14,478,522.41
16,805,389.97
18,964,434.21
20,718,419.22
22,300,736.49
INCOME
Sales
3,826,278.84
3,941,067.21
4,059,299.22
4,181,078.20
4,013,835.07
3,853,281.67
Other revenue
2,965.00
14,825.00
74,125.00
70,418.75
66,897.81
63,552.92
Total Cash Available
15,869,192.63
18,434,414.62
20,938,814.19
23,215,931.16
24,799,152.11
26,217,571.08
EXPENDITURE
Wages & Salaries
468,000.00
702,000.00
1,053,000.00
1,579,500.00
1,563,705.00
1,548,067.95
Tax & insurance cost
69,028.87
69,719.16
70,416.35
71,120.51
71,831.72
72,550.04
Administrative costs & Office Supplies
17,766.30
17,775.18
17,784.07
17,792.96
17,801.86
17,810.76
Repairs and Maintenance
32,305.75
32,951.87
33,610.90
34,283.12
32,568.96
30,940.52
Rent
65,000.00
64,350.00
63,706.50
64,980.63
66,280.24
67,605.85
Equipment Financing (Vulcan Mold Maker)
335,400.00
335,400.00
325,338.00
315,577.86
328,200.97
341,329.01
Electricity
37,255.74
37,255.74
37,255.74
37,255.74
37,255.74
37,255.74
Raw Material (Sand Molds)
365,913.56
369,572.70
373,268.42
377,001.11
380,771.12
384,578.83
TOTAL EXPENDITURE
1,390,670.22
1,629,024.64
1,974,379.99
2,497,511.93
2,498,415.62
2,500,138.69
Cash Flow
14,478,522.41
16,805,389.97
18,964,434.21
20,718,419.22
22,300,736.49
23,717,432.38
NPV
Year o
Year 1
Year 2
Year 3
Year 4
Year 5
Total NPV
14478522.41
16805389.97
18964434.21
20718419.22
22300736.49
23717432.38
$5,074,786.54
The sales steadily increased for the first three years of the operation. It then declined as the inflation rate of approximately 4% applied to the cost of operation incurred for the remaining two years. The acquisition of this machine look even more constructive as NPV of the cash flows roughly doubles (5,074,786.54) and the IRR increases averagely by not less that 50%. Additionally, the repayment period of the Vulcan Mold-Maker is condensed to the first year of operation. The sales value makes determination of cash flow easier as the company's stakeholders and employees require immediate cash resources than waiting for a long time.
Appendix I: Financial Structure
Dept Asset ratio
2010
2009
Assets Total
10194000
7269000
Depts. total
17855000
17626000
0.570933
0.412402
Total Dept Equity Ratio
2010
2009
Equity owners
9990000
6940000
Total Depts.
17855000
17626000
Total Dept Equity Ratio
0.559507
0.393737
Long-Term Debt -Equity Ratio
2010
2009
Equity Shareholder
8885000
Long-Term Debt
1138000
7.807557
Appendix II: Liquidity
Current ratio
2010
2009
Current assets
27845000
24566000
Current liabilities
17855000
17626000
Current ratio
1.559507
1.393737
Quick ratio
2010
2009
Cash equivalents
21183000
Short-term investments
179000
Accounts receivable
Current liabilities
17855000
1.196416
Appendix III: Profitability
Gross Margin
2010
2009
Gross Profit
10261000
14265000
Net Sales
39
33
0.263103
0.432273
Operating Profit Margin
2010
2009
EBIT
6142000
10313000
Net Sales
40297000
40366000
0.152418
0.255487
Net Profit Margin
2010
2009
Net Income
5761000
8479000
Net Sales
40297000
40366000
0.142963
0.210053
Return On asset
2010
2009
Total Income
5761000
8479000
Total Asset
10194000
7269000
0.565136
1.16646
Return on Equity
2010
2009
Net Income
5761000
8479000
Stakeholder equity
8885000
6086000
0.648396
1.393198
Cash Return on Asset
2010
2009
Cash flow from operating activity
6142000
10313000
Total asset
10194000
7269000
0.602511
1.418765
Appendix IV: Efficiency ratios
Collection Ratio
2010
2009
Accounts Receivable
50558000
54631000
Sales
40297000
40366000
Days
Sales to Inventory
2010
2009
Net Sales
40297000
40366000
Inventory
50558000
54631000
0.797045
0.738885
Assets to Sales Ratio
2010
2009
Total assets
10194000
7269000
Net Sales
40297000
40366000
0.252972
0.180077
Accounts payable to Sales Ratio
2010
2009
Accounts payable
18026000
17790000
Net Sales
40297000
40366000
0.447329
0.440717
IRR
5,074,786.54=14478522.41+ 16805389.97 + 18964434.21 + 20718419.22 + 22300736.49 + 23717432.38 = 124%
(1+70%)^1 (1+70%)^2 (1+70%)^3 (1+70%)^4 (1+70%)^5
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