Jaedan Industries Mini Case Analysis Essay

Jaedan Industries Mini Case Analysis Essay

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 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…

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