Financial Statements
Jaedan Industries
Income Statement
For the year ending 31 December, 2010
Sales
$42,000,000
COGS
$26,460,000
Gross Profit
$15,540,000
Operating Expenses
Selling, General & Administrative
$1,621,000
Depreciation
$800,000
Earnings Before Interest & Tax
$13,119,000
Interest Expense
$375,000
Earnings before Taxes
$12,744,000
Taxes
$4,332,960
Net Income
$8,411,040
Dividends Paid
$2,102,760
Additions to Retained Earnings
$6,308,280
Jaedan Industries
Statement of Retained Earnings
For the Year Ending December 31, 2010
Balance from 1 Jan 2010
$1,628,819
Addition: Net Income of year
$8,411,040
Less: Cash dividends paid during the year
Preferred Stock
$8,000
Common Stock
$2,102,760
Total Dividends Paid
$2,110,760
Retained Earnings Balance as at 31 Dec, 2010
$7,929,099
Jaedan Industries
Balance Sheet
For Year Ended 31 December, 2010
Assets
Cash
$3,689,000
Marketable Securities
$1,836,000
Accounts Receivable
$5,423,000
Inventory
$4,118,000
Total Current Assets
$15,066,000
Fixed Assets
$14,811,000
Less: Accumulated Depreciation
$5,960,000
Net Fixed Assets
$8,851,000
Total Assets
$23,917,000
Liabilities and Equity
Accounts Payable
$3,136,000
Notes Payable
$706,000
Accruals
$500,000
Total Current Liabilities
$4,342,000
Long-term bonds
$3,046,000
Preferred Stock
$100,000
Common Stock (at par)
$4,000,000
Paid -in capital that is in excess of par
$4,500,000
Retained Earnings
$7,929,099
Total Liabilities and Equity
$23,917,099
Jaeden Industries
Statement of Cashflows
For the year ended December 31, 2010
Cash flow from operating activities
Net Income
$8,411,040
Depreciation
$800,000
Increase in Accounts Receivable
($2,556,000)
Increase in Inventory
($908,000)
Increase in Accounts Payable
$190,000
Increase in Accruals
$150,000
Cash from operating activities
$6,087,000
Cash flow from Investing activities
Increase in gross fixed assets
($2,932,000)
Cash emanating from investing activities
($2,932,000)
Cashflow from financing activities
Increase in Notes Payable
$22,000
Dividends paid:
Preferred Stock
$8,000
Common Stock
($2,102,760)
Cash flow emanating from financing activities
($2,088,760)
Net Increase (Decrease) in Cash and marketable securities
$1,066,280
1. Calculate Jaedan Industries' free cash flow
The operating cash flow (OCF) is calculated using the following formula:
OCF = [EBIT x (1 -- T)] + Depreciation
OCF = [13,119, 000 x (1-0.34)] + 800000
=$9,458,540
The following table indicates the calculation of the free cash flow for Jaedan Industries
Free Cash Flow
Amount
Operating Cash Flow (OCF)
$9,458,540
Change in Fixes Assets
$2,932,000
Change in Current Assets
$4,530,181
Change in Accounts Payable
$190,000
Change Accruals
$150,000
Therefore, Free Cash Flow is attained by:
$9,458,540 - $2,932,000 -- ($4,530,181 - $190,000 -$150,000)
Free Cash Flow of Jaedan Industries = $2,336,359
2. Calculate Jaedan Industries' liquidity
Liquidity ratios measure a company's capability to meet short-term debts, that is, its ability to liquidity assets into cash without any loss in its value or worth.
Liquidity Ratios
Jaedan
Industry
Current Ratio
3.47
3.26
Quick Ratio
2.52
2.19
The term current implies that the period considered is less than or equal to one fiscal year. The current ratio measures the current assets in relation to the current liabilities to ascertain and determine whether the firm has adequate assets that can be liquidated immediately so as to pay off debts and obligations (Tracy, 2012). The current ratio is calculated using the following formula:
Current Ratio = Total Current Assets / Total Current Liabilities
= $15,066,000 / $4,342,000
= 3.469
= 3.47
This ratio is quite similar and can be likened to the current ratio, but in this case is actually devoid of inventories. The quick ratio is calculated using the following formula:
Quick Ratio = (Total Current Assets -- Inventory)/Total Current Liabilities
= ($15,066,000 - $4,118,000) / $4,342,000
= 2.52
3. Calculate Jaedan Industries' Debt and Profitability Ratios
Debt Ratios
Jaedan
Industry
Debt Ratio
30.89%
39.36%
Assets-to-equity ratio
Debt-to-equity ratio
18.43%
30.23%
Times interest earned
34.98
16.81%
The debt ratio measures the amount of assets of a company that are financed by debt. This is computed using the following formula:
Debt ratio = (Total Current Liabilities + Long-Term Bonds) / Total Assets
= ($4,342,000 + $3,046,000) / $23,917,000
= 30.89
The assets to equity ratio measures the connection between the total assets of a company to the fraction possessed or owned by the stakeholders of a company.
Asset to equity ratio = Total Assets / (Total Liabilities & Equity -- Long-term bonds -- Total Current Liabilities-Preferred Stock)
= $23,917,000 / ($23,917,000 - $3,046,000 - $4,342,000 - $100,000)
= 145.58
Debt to Equity ratio is a financial ratio that measures the extent of financial leverage that the company employs to enhance its returns. This is computed using the following formula:
Debt...
This is calculated using the following formula:
Time Interest earned = EBIT / Interest Expense
= $13,119,000 / $375,000
= 34.98
Profitability Ratios
Jaeden
Industry
Gross profit margin
37.00%
23.74%
Operating profit margin
31.24%
20.89%
Net profit margin
20.03%
17.97%
Earnings per share
8.4
4.58
Return on Total Assets
35.13%
41.87%
Return on Common Equity
51.15%
68.30%
Profitability ratios show whether or not a company is making as much profit as it should. The gross profit margin shows the profitability rate in accordance to the gross profit it generates. The gross profit margin is calculated using the following formula:
Gross profit margin = Gross Profit / Sales Revenue
= $15,540,000 / $42,000,000
= 37%
Operating profit margin is a profitability ratio that compares the amount of operating income with that of revenue. This ratio considers the expenses of production that are not related to the direct production of products or services and these expenses include administrative expenses. This ratio is calculated using the following formula:
Operating profit margin = Earnings before interest and tax / Sales Revenue
= $13,119,000 / $42,000,000
= 31.235%
The Net Profit Margin is a profitability ratio that is indicative of the profitability levels of the company with regard to the net income in comparison to the revenues of the firm (Weygandt et al., 2008). This ratio is computed using the following formula:
Net profit margin = Net Income / Sales
= $8,411,040 / $42,000,000
= 20.026%
The EPS financial ratio indicates the profitability level and performance of a company as it is the percentage of a company's profit that is apportioned for every outstanding share of common stock. This is calculated as follows:
Earnings per Share = Earnings avail for common stockholders / number of common stock shares outstanding
= $8,403,040 / $1,000,000
= $8.40
Return on assets (ROA) is a financial ratio that measures the profitability of a company, but also its financial health. This ratio, in particular, places emphasis on measuring the profitability of the assets that are only used to generate net income for the company. ROA is calculated by dividing net income attributable to stakeholders generated by the total assets (Weygandt et al., 2008). This is as shown in the formula below:
Return on Total Assets = Earnings attributable to common stockholders / Total Assets
= $8,403,040 / $23,917,000
= 35.134%
The return on equity can be described as the amount of profit return or the net income that a company generates from every dollar that emanates from its equity. This is usually of great value and benefit to the users of financial statements and, in particular, the investors to perceive what kind of profit the shareholders are obtaining as returns of their investment. It reveals just how the company makes use of the funds that are invested by the shareholders in the company. This is as shown in the formula below:
Return on Common Equity = Earnings attributable to common stockholders / Common Stock Equity
= $8,403,040 / $16,429,000
= 51.147%
4. Calculate Jaedan Industries' market ratios
Market Ratios
Jaedan
Industry
P/E Ratio
6.76%
5.97%
Market Book Ratio
3.46%
4.32%
This is a financial ratio, which enables the valuation of a company as it measures the prevailing share price of a company in relation to its earnings per share (Weygandt et al., 2008). This is calculated using the following formula:
P/E Ratio = Market Price per share of common stock / Earnings per Share
= $56.82 / $8.40
= 6.76%
The market-to-book ratio is a financial ratio also referred to as the price-book ratio, which enables the valuation of a company as it makes a comparison of the book value of a company to the market value of the company. This is computed using the following formula:
Market-Book Ratio = Market Price per share of common stock / Book Value per share of common stock
= $56.82 / $16.43
= 3.46%
The book value of equity for every share is a ratio that signifies a per share evaluation of the least value of the equity of a company. This is computed using the following formula:
Book value per share of common stock = common stock equity / shares outstanding
= 16,429,000 / 1,000,000
= $16.43
Part B
Highlight at least three financial strengths and three weaknesses Jaeden Industries may have
1. Strengths
i. One of the strong suits lies within its liquidity. The prevailing current ratio of Jaeden Industries surpasses the ideal 2:1 ratio. The same case applies for the acid test ratio in which the ideal ratio of 1:1 is surpassed. This indicates that Jaden Industries is in a strong position of being able to meet its current obligations and still generate a return.
ii. Another strength of Jaeden Industries encompasses its strong profitability levels and performance. The operating profit margin and net profit margin of the company stand at 31.24% and 20.03%, respectively. This indicates that the company generates a healthy return. For instance, the company generates a return of 31.24 cents in terms of operating profit and 20.03 cents in terms of net profit for every dollar of revenue generated.
iii. Jaeden Industries has a strong position in terms of investment and utilization of its resources. This can be perceived in its return on asset and return on equity ratios. The company management has been fully effective in utilizing its resources, that is, assets and equity, to generate income in general. For instance, the company generated a return of 35.13 cents for every dollar invested in its assets and a return of 51.15 cents for every dollar invested in its shareholders' equity.
2. Weaknesses
i. One of the company's weaknesses lies in the consumers' perspective with reference to the performance of the company. In the contemporary, the investors are paying $3.46 for every $1.00 of book value of Jaedan Industries' stock. This amount is lower than the preceding fiscal year. This indicates that the investors are perceptive that the company might not grow as they…
Corporate Finance Ratio Liquidity Ratios Current ratio Activity Ratios Inventory turnover Total asset turnover Debt ratios Debt ratio Debt-to-equity ratio Profitability ratios Return on common equity Return on total assets DuPont Analysis The DuPont equation, according to Besley and Brigham (), can be captured as follows: ROE = Net Profit Margin * Total Assets Turnover In a tabular form, this would be: Net profit margin Total assets turnover ROE The current ratios of Jaedan Industries do not differ significantly from the industry ratios for the two years under consideration.