Jaedan Industries Mini Case Analysis

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 to equity-ratio = Long-Term Bonds / (Total Liabilities and Equity -- Long-term bonds -- Total Current Liabilities) = $3,046,000 / ($23,917,000 - $3,046,000 - $4,342,000) = 18.43 The times interest earned ratio is a debt ratio that is employed to measure the capacity of a company to meet its debt obligations.

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.