Jaedan Industries Financial Statement Analysis 2010

Financial Statements Overview

The following financial statements cover Jaedan Industries for the fiscal year ending December 31, 2010.

Income Statement — For the Year Ending December 31, 2010

Sales: $42,000,000
Cost of Goods Sold (COGS): $26,460,000
Gross Profit: $15,540,000

Operating Expenses:
Selling, General & Administrative: $1,621,000
Depreciation: $800,000
Earnings Before Interest & Tax (EBIT): $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

Statement of Retained Earnings — For the Year Ending December 31, 2010

Balance from January 1, 2010: $1,628,819
Addition — Net Income for the 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 December 31, 2010: $7,929,099

Balance Sheet — For the Year Ended December 31, 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 in Excess of Par: $4,500,000
Retained Earnings: $7,929,099
Total Liabilities and Equity: $23,917,099

Statement of Cash Flows — 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 from Investing Activities: ($2,932,000)

Cash Flow from Financing Activities
Increase in Notes Payable: $22,000
Dividends Paid — Preferred Stock: $8,000
Dividends Paid — Common Stock: ($2,102,760)
Cash Flow from Financing Activities: ($2,088,760)

Net Increase (Decrease) in Cash and Marketable Securities: $1,066,280

Free Cash Flow Calculation

The free cash flow for Jaedan Industries is derived by first computing the operating cash flow (OCF) using the following formula:

OCF = [EBIT × (1 − T)] + Depreciation
OCF = [$13,119,000 × (1 − 0.34)] + $800,000
OCF = $9,458,540

The free cash flow is then calculated as follows:

Free Cash Flow = OCF − Change in Fixed Assets − (Change in Current Assets − Change in Accounts Payable − Change in Accruals)

Using the figures below:

Operating Cash Flow (OCF): $9,458,540
Change in Fixed Assets: $2,932,000
Change in Current Assets: $4,530,181
Change in Accounts Payable: $190,000
Change in Accruals: $150,000

Free Cash Flow = $9,458,540 − $2,932,000 − ($4,530,181 − $190,000 − $150,000)
Free Cash Flow of Jaedan Industries = $2,336,359

Liquidity Ratios

Liquidity ratios measure a company's capability to meet short-term debts — that is, its ability to convert assets into cash without significant loss in value.

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 current assets in relation to current liabilities to determine whether the firm has adequate assets that can be liquidated immediately to pay off debts and obligations (Tracy, 2012). It is calculated as follows:

Current Ratio = Total Current Assets / Total Current Liabilities
= $15,066,000 / $4,342,000
= 3.47

The quick ratio is similar to the current ratio but excludes inventories, providing a more conservative measure of short-term liquidity. It is calculated as follows:

Quick Ratio = (Total Current Assets − Inventory) / Total Current Liabilities
= ($15,066,000 − $4,118,000) / $4,342,000
= 2.52

Both ratios exceed their respective industry averages, indicating that Jaedan Industries is well positioned to meet its current obligations.

Debt and Profitability Ratios

Debt Ratios

Debt Ratios | Jaedan | Industry
Debt Ratio | 30.89% | 39.36%
Debt-to-Equity Ratio | 18.43% | 30.23%
Times Interest Earned | 34.98 | 16.81

The debt ratio measures the proportion of a company's assets that are financed by debt:

Debt Ratio = (Total Current Liabilities + Long-Term Bonds) / Total Assets
= ($4,342,000 + $3,046,000) / $23,917,000
= 30.89%

The asset-to-equity ratio measures the relationship between total assets and the portion owned by shareholders:

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

The debt-to-equity ratio measures the degree of financial leverage employed by the company:

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 measures the company's capacity to meet its debt obligations from operating earnings:

Times Interest Earned = EBIT / Interest Expense
= $13,119,000 / $375,000
= 34.98

Profitability Ratios

Profitability Ratios | Jaedan | 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 | $8.40 | $4.58
Return on Total Assets | 35.13% | 41.87%
Return on Common Equity | 51.15% | 68.30%

Profitability ratios indicate whether a company is generating adequate profit relative to its revenues and resources. The gross profit margin reflects the profitability rate based on gross profit generated:

Gross Profit Margin = Gross Profit / Sales Revenue
= $15,540,000 / $42,000,000
= 37.00%

The operating profit margin compares operating income to revenue, accounting for expenses not directly related to production, such as administrative expenses:

Operating Profit Margin = EBIT / Sales Revenue
= $13,119,000 / $42,000,000
= 31.24%

The net profit margin indicates profitability levels relative to net income compared to revenues (Weygandt et al., 2008):

Net Profit Margin = Net Income / Sales
= $8,411,040 / $42,000,000
= 20.03%

Earnings per share (EPS) represents the portion of a company's profit allocated for each outstanding share of common stock:

EPS = Earnings Available for Common Stockholders / Number of Common Shares Outstanding
= $8,403,040 / 1,000,000
= $8.40

Return on total assets (ROA) measures the profitability and financial health of a company by evaluating how effectively its assets generate net income (Weygandt et al., 2008):

Return on Total Assets = Earnings Attributable to Common Stockholders / Total Assets
= $8,403,040 / $23,917,000
= 35.13%

The return on common equity (ROE) measures the net income generated for every dollar of shareholders' equity. It is of particular value to investors in assessing the returns generated on their investment and reveals how effectively management uses shareholder funds (Weygandt et al., 2008):

Return on Common Equity = Earnings Attributable to Common Stockholders / Common Stock Equity
= $8,403,040 / $16,429,000
= 51.15%