About the paper
The paper is commissioned to conduct financial analysis of Jaedan Industry. As part of this analysis, we will be calculating the free cash flow of the firm for the year 2010. In addition to this, we will also run the financial figures for the year 2009 and 2010 under the microscope of financial ratios to unearth the strengths and weaknesses in the firm’s organizational architecture.
Income Statement:
Balance Sheet
Cash Flow Statement
Calculating Jaedan’s Free Cash Flow
In order to calculate the free cash flow of the firm, we will be using the excerpts from the financial statements, while the figures will be used in the following formula:
FCFF: [EBIT*(1-tax rate)] + Depreciation- Fixed Capital Investment- Working Cap Investment
= 13119000*(1-0.34) + 800000- 2932000-(4530181- 190000- 150000)
= $2336359
Note: EBIT is sourced from income statement
ii) Tax Rate has been sourced from the income statement
iii) Change in Fixed Capital Investment: 14811000- 11879000= $2932000
iv) Change in Current Assets: 15066000- 10535819= $4530181
v) Change in Accounts Payable: $3,136,000 - $2,946,000 = $190,000
vi) Change in Accruals: 500000-350000= $150000
Liquidity Ratio
In order to access the ability of the company to honor its short-term obligations and how the trend relating to it have changed over the year, we have calculated the following two liquidity ratios:
i) Current Ratio: Current Assets/ Current Liabilities
2009: 10535819/3980000= 2.64
2010: 15066000/4342000= 3.46
ii) Acid Ratio: Current Assets- Inventory/Current Liabilities
2009: (10535819-3210000)/3980000= 1.84
2010: (15066000-4118000)/4342000= 2.52
Profitability Ratio
In order to access the profitability trend and profit margins of the company, we have calculated the following three profitability ratios:
i)Gross Profit Ratio: Gross Profit/ Revenue
2009: 11573447/38578155= 30%
2010: 15540000/42000000= 37%
ii) Operating Profit Margin: Operating Profit/ Revenue
2009: 9873447/38578155= 25.55%
2010: 13119000/42000000= 31.23%
iii) Net Income Margin: Net Income/ Revenue
2009: 6268975/38578155= 16.25%
2010: 8410908/ 42000000= 20.02%
iv) Return on Common Equity: Net Income/ Total Equity
2009: 6268975/10228819= 61.28%
2010: 8410908/16529000= 50.88%
v) Return on Assets: Net Income/ Total Assets
2009: 6268975/17254819= 36.33%
2010: 8410908/23917000= 35.16%
vi) EPS: (Net Income- Preferred Dividend)/Common Shares Outstanding
2009: (6268975-8000)/1000000= 6.26
2010: (8410908-8000)/1000000= 8.40
Debt Ratio
These financial ratios assist the analysts in unearthing the composition of the capital structure of the company, and whether its earnings justifies its leverage position. Below we have calculated three debt ratios of the company:
i) Debt-Equity Ratio: Debt/ Equity
2009: 3046000/10228819= 0.297
2010: 3046000/16529000= 0.184
ii) Debt Ratio: Debt/ Total Assets
2009: 3046000/17254819= 0.176
2010: 3046000/23917000= 0.127
iii) Times Interest Earned: Operating Income/ Interest Expense
2009: 9873447/375000= 26.32
2010: 13119000/375200= 34.97
Market Ratios
Also known as Investment Ratios, these ratios provides information about the investment attractiveness of the stock. While sole calculation of these ratios is meaningless, analysts compare the outcome of these ratios with the industrial averages to analyze whether the stock is worth enough to be included in the portfolio. Below we have calculated the following market ratios of the company:
i) PE Ratio: Market Price/EPS
2009: 42.89/6.27= 6.84
2010: 56.82/8.41= 6.76
ii) Market to Book Ratio: Market price per share/ Book value per share
2009: 42.89/13.27= 4.23
2010: 56.82/16.42= 3.45
*Book value per share: (Total Assets- Total Liabilities)/Common Shares Outstanding
Comparison with the industry average
Strengths:
i) Strong Solvency Positions
Referring to the above figures, we can see that the debt ratio of the company has declined significantly relative to the previous year. However, it is noteworthy that this decrease is not source from decline in the debt position but from increase in the asset position of the company, which was largely sourced from cash from operations and not from financing activity. In addition to this, the debt to equity ratio of the company has also decreased amid increase in the equity position of the company. However, what may entice the investor is the increase in the interest coverage ratio during the environment of constant long-term debt which confirms the ability of the company to honor interest payments with ease. Moreover, these ratios are also significantly higher than the industry.
Overall, the trend in the debt ratio confirms strong solvency position of the company.
ii) Strong Liquidity
As noted from the above figures, Jaedan has improved its liquidity position during 2010 and has surpassed the industry’s current ratio benchmark. In addition, the acid ratio of the company has surged significantly from 1.84 to 2.52, still way above than the industry average.
Therefore, the trend reveals that the company is having strong liquidity roots.
iii) Strong Profitability Position
In respect to the profitability position, Jaedan has improved its profit margins during the year. In addition, the company is consistently outperforming the industry in converting its sales dollars to profit. Most importantly, the operating margin and the EPS of the company has attained a strong increase, and is well above the industrial averages.
Weakness
i) Decline in Return on Assets
While the company managed to register strong growth in its profit margins, the ROA multiple declined marginally from 36.29% to 35.31%, while the industrial average took an opposite path.
Therefore, the company should try to improve this trend next year with efforts on higher net income relative to its asset base.
ii) Decline in Return on Equity:
Another important concern for the company was the decline in the ROE multiple that went down from 61.28% to 50.88%, while the industry took an opposite path and the ratio multiple surged from 53.63% to 68.30%.
Therefore, the management of the company should work on generating higher returns for its equity holders.
iii) Decline in market ratios:
Although the stock price of the company has increased from $42.89 to $56.82 per share during the year, however, the PE ratio and Market/Book ratio have dropped. This indicates that the investors are not willing to pay higher amount for the earnings and the book value, although it’s lower price-book value ratio multiple than the industry do indicate its undervaluation.
Conclusion
At the end of this paper, we can conclude that over the year, Jaedan has significantly improved its position with strong liquidity, profitability and solvency position. Most importantly, most of the ratio multiples are recorded above than the industrial average confirming supremacy of the company relative to its peers.
