IntroductionThis report utilizes ratio analysis in an attempt to derive quantitative measure or guides concerning the financial health and profitability of Jitterbug Pty Ltd. Ratio analysis can is used both in trend and static analysis. This report will analyze Jitterbug’s financial statements (balance sheet and income statement) to come up with various important financial ratios. The percentage calculations provided in this report give a comprehensive measure of Jitterbug’s profitability, liquidity and financial stability on a historical basis (3years) and in comparison to industry benchmarks. The report is based upon Jitterbug’s financial situation before the issuance of any loan.
After considering these three characteristics a clear recommendation regarding the company is given. ProfitabilityProfitability of Basically, it is the amount of profit, gross, operating, pretax or net that is generated by the company expressed as a percent of the sales generated. The company’s return on assets has been increasing from 23.5% in 2008 to 48.9% to 49.4% in 2009 and 2010 respectively. The margin analysis indicates that the company’s earnings are on an upward trend. However this is still below industry’s average of 55.0%.
The increase in gross profit margin is also reflected in the upward trend of the increase on the return on shareholders’ equity, i.e. , from 19.0% to 41.9% and 44.3% in 2009 and 2010. The upward trend in profitability translates implies increasing investment quality. To a significant degree, a company’s equity earnings are affected by the quality and growth of its profitability earnings which drive its stock price. That is why the company’s earnings per share has also been on the upward trend. It can be argued that the company is gradually gaining control over input costs, mainly because the company is gaining stability in its production process (including its retail and service businesses).
The increase in profitability is as a result of increased sales revenue due to enhanced quality and production (service) efficiency. The company's cost of sales has relatively remained stable; reducing from 50.3% in 2008 to 45.5% in 2009, before increasing slightly to 46.4% in 2010. These costs are related to labor, inputs and production involved in its supply chain. In general, the company’s production processes are steadily becoming more efficient, but are still below the industry’s average, a higher margin percentage is a complimentary profit indicator. LiquidityLooking at the current ratio, we observe a downward trend, 4.15, 3.06, and 2.05 for 2008, 2009, and 2010 respectively.
It is important to understand that the company has cash, accounts receivables, inventory and prepaid expenses as the main current assets. The company’s ability to meet its current liabilities has been deteriorating. Observing the quick ratio (removing inventories), it is clear that the company’s liquidity is still on the downward trend, as the ratio decreases from 2.81 in 2008 to 1.25 in 2010.
Thus, the company’s ability to meet its most liquid liabilities has decreased significantly. Comparing the quick ratio with the current ratio, it is important to note that the current ratio is significantly higher; this indicates that the company's current assets are very much dependent on inventory. In as much as it is theoretically feasible, as a going concern, the company must also take note of the time it takes to convert its working capital assets to cash, this is a more practical measure of liquidity.
The company’s inventory turnover improved from 112 days in 2008 to 97 days before rising to 100 days in 2010. Compared to the industry average of 37 days, the company’s liquidity is relatively position weak. On the other hand, the company’s debtor’s turnover rate has improved from 5.0 times in 2008 to 7.3 times in 2009 and 2010. This shows that debts were collected more rapidly in 2009 and 2010 as compared to 2008. The operating cycle improved from 186 days in 2008 to 148 days in 2009 before slighting increasing to 150 days in 2010.
This indicates trend, if this trend persists, the company's efficiency in managing its important working capital assets may be significantly affected; secondly, it is clear that the company may experience difficulties in paying off its current liabilities.