Financial Analysis - Jitterbug Pty Ltds Loan Application - Assignment Example

SOUTH AUSTRALIAN INSTITUTE OF BUSINESS AND TECHNOLOGY ASSIGNMENT COVER SHEET (Please fill in all details clearly and staple to the front of your assignment) Course Name: ___________________________________ Course Code: ___________________________________ Lecturer’s Name: ___________________________________ Assignment No/Title: _____________________________Due Date: ____________ Student Name: Student ID Date 1. 2. FINANCIAL ANALYSIS REPORT ON JITTERBUG PTY LTD’S LOAN APPLICATION for [Enter the name of the client] [Enter the date of submission] prepared by [Enter your name/s] Executive Summary This report utilizes ratio analysis in an attempt to derive quantitative measure or guides concerning the financial health and profitability of Jitterbug Pty Ltd. This is an analyst report of Jitterbug’s financial statements (balance sheet and income statement) to give a comprehensive measure of Jitterbug’s profitability, liquidity and financial stability on a historical basis (3years) and in comparison to industry benchmarks. It is clear that the company may experience difficulties in paying off its current liabilities. Positive profit margin directly translates into positive investment quality and to a significant degree; the quality and growth of the company's earnings have driven up its stock value. Financial stability ratios indicate that the company’s efficiency with which assets are employed has slightly improved and can be increased further. The degree of efficiency in asset utilization is relatively favorable. It is recommended that the company can use its lowly leveraged position to increase the financial resources available for investment in the growth and expansion of its operations. Contents Introduction This 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. Profitability Profitability 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. Liquidity Looking 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. Financial Stability The company’s debt ratio has been increasing from 2008 to 2009 through 2010, by 21.2%, 24.6%, and 21.2% respectively, while the equity ratio indicating that the company is increasingly relying on debt financing relative to equity. However, the company is currently holding more equity than debt, acquiring more debt might not be a bad idea. Times Interest Earned ratio was 11.6 in 2008 which increased to 18.5 in 2009, before decreasing to 16.3 in 2010. An increase in interest rate implies that the company is able to cover the interest expense at a relatively higher margin of safety in 2010, but slightly lower than 2009. This can be attributed to due to increased short term borrowing but maintained its long term borrowing. As a consequence, operating net profit increased by 116 million to 220 million in 2009, before falling to 214 million in 2010, whereas the interest charges only increased by 4 million in 2009, followed by a 2 million increase in 2010. Thus the company made an intelligent move to borrow less and source investment financing from through other financing techniques. Based on the calculations, the productivity of assets in year 2010 is better than it was in previous years. In 2009, it was 3.41 times and in 2008 it was 3.05, though the change is only minimal. This change was brought about by increase in total sales. The capitalization ratio has gradually improved from 1.27 in 2008, to 1.33 to 2009, and further to 1.41 in 2010. The capitalization ratio indicates that the company’s debt is slightly increasing, however debt liabilities as a component of the company's total capital base are still in a healthy position, as the company is relying more on equity capital. Conclusion In sum, the company’s production processes are gradually becoming more efficient, but are still below the industry’s average, a higher margin percentage is a complimentary profit indicator. The trend indicated above is not very healthy as compared to industry standards, if this trend persists; the company's efficiency in managing its important working capital assets may be significantly affected. In addition, it is clear that the company may experience difficulties in paying off its current liabilities. Ideally, it is the company’s profitability, (gross, operating, pretax or net income) generated by the company as a percent of the sales generated indicate positive trends in the company's earnings. The company has continued to maintain a low level of debt and a healthy proportion of equity in its capital structure, an indication of financial fitness. Financial stability ratios indicate that the company’s efficiency with which assets are employed has slightly improved and can be increased further. The degree of efficiency in asset utilization is relatively favorable. Recommendation Industry characteristics indicate that raw material costs, predominantly as they relate to the stability or lack of it, significantly affect a company's gross margin. In general, management cannot exercise control, in entirety over such costs. But since Jitterbug has a production process (selling products and service) their cost of sales is exact and must be minimized. Prudent use of leverage (debt) is known to increase the financial resources available for investment in the growth and expansion of a company’s operations. Debt can be used to earn more on borrowed funds more than the expense of interest paid on these funds. The company will need to maintain a solid record of complying with its borrowing commitments. Therefore, Jitterbug can use its low-leverage advantage; its freedom of action is not restricted by its creditors to increase its profitability through increased investments. Reference List Jitterbug Pty Ltd. Case study Appendices Jitterbug Pty Ltd Comparative Income Statement for the years ended 30 June 2010 2009 and 2008 Horizontal Analysis (in thousands of dollars) Common Size Analysis* Trend Analysis 2009 -2010 2008 -2009 2010 2009 2008 2010 2009 2008 2010 2009 2008 $ % $ % Net Sales 474 490 396 100.0% 100.0% 100.0% 120% 124% 100% -16.0 -3.3% 94.0 23.7% Cost of Sales 220 223 199 46.4% 45.5% 50.3% 111% 112% 100% -3.0 -1.3% 24.0 12.1% Gross Profit 254 267 197 53.6% 54.5% 49.7% 129% 136% 100% -13.0 -4.9% 70.0 35.5% Venue Income 1,798 1,830 1,721 100.0% 100.0% 100.0% 104% 106% 100% -32.0 -1.7% 109.0 6.3% 2,052 2,097 1,918 100.0% 100.0% 100.0% 107% 109% 100% -45.0 -2.1% 179.0 9.3% Expenses: Selling & Admin 1,726 1,764 1,755 84.1% 84.1% 91.5% 98% 101% 100% -38.0 -2.2% 9.0 0.5% Interest 20 18 14 1.0% 0.9% 0.7% 143% 129% 100% 2.0 11.1% 4.0 28.6% Total 1,746 1,782 1,769 85.1% 85.0% 92.2% 99% 101% 100% -36.0 -2.0% 13.0 0.7% Operating Profit Before Tax 306 315 149 14.9% 15.0% 7.8% 205% 211% 100% -9.0 -2.9% 166.0 111.4% Income Tax Expense 92 95 45 4.5% 4.5% 2.3% 204% 211% 100% -3.0 -3.2% 50.0 111.1% Operating Profit after Tax 214 220 104 10.4% 10.5% 5.4% 206% 212% 100% -6.0 -2.7% 116.0 111.5% * Modified to accomodate Sales and Venue Income Jitterbug Pty Ltd Comparative Balance Sheet as at 30 June 2010 2009 and 2008 Horizontal Analysis (in thousands of dollars) Common Size Analysis Trend Analysis 2009 -2010 2008 -2009 2010 2009 2008 2010 2009 2008 2010 2009 2008 $ % $ % Assets: Cash 122 158 172 18.7% 23.7% 24.8% 71% 92% 100% -36.0 -22.8% -14.0 -8.1% Accounts Receivable (net) 15 11 16 2.3% 1.6% 2.3% 94% 69% 100% 4.0 36.4% -5.0 -31.3% Inventory 62 58 61 9.5% 8.7% 8.8% 102% 95% 100% 4.0 6.9% -3.0 -4.9% Pre Paid Expenses 26 30 29 4.0% 4.5% 4.2% 90% 103% 100% -4.0 -13.3% 1.0 3.4% Property Plant & Equip (net) 428 410 416 65.5% 61.5% 59.9% 103% 99% 100% 18.0 4.4% -6.0 -1.4% Total Assets 653 667 694 100.0% 100.0% 100.0% 94% 96% 100% -14.0 -2.1% -27.0 -3.9% Liabilities: Current Liabilities 110 84 67 16.8% 12.6% 9.7% 164% 125% 100% 26.0 31.0% 17.0 25.4% Non-current Liabilities 80 80 80 12.3% 12.0% 11.5% 100% 100% 100% 0.0 0.0% 0.0 0.0% Total Liabilities 190 164 147 29.1% 24.6% 21.2% 129% 112% 100% 26.0 15.9% 17.0 11.6% NET ASSETS 463 503 547 70.9% 75.4% 78.8% 85% 92% 100% -40.0 -8.0% -44.0 -8.0% Equity: Paid Up Capital 360 360 360 55.1% 54.0% 51.9% 100% 100% 100% 0.0 0.00% 0.0 0.00% Retained Profits 103 143 187 15.8% 21.4% 26.9% 55% 76% 100% -40.0 -27.97% -44.0 -23.53% 463 503 547 70.9% 75.4% 78.8% 85% 92% 100% -40.0 -7.95% -44.0 -8.04% Jitterbug Pty LTD, Ratio Analysis Part B: The use ratio analysis comes with a number of shortcomings. It is important to note that financial stability ratios, especially the ratio should be used with caution because they include fixed assets which may be old and significantly depreciated, therefore, the calculation of fixed assets turnover ratio may appear to be high because the denominator used in the calculation is very low. Positive profit margin directly translates into positive investment quality and to a significant degree improvement in the quality and growth of the company’s earnings, driving up stock value. But, stock prices are affected by a myriad of factors, most of which are beyond management’s control. In addition, the company must be careful in taking a debt that is average so as to avoid experiencing problems in meeting operating and debt liabilities on time and in surviving in times of unfavorable economic conditions. Finally, since the company operates in a highly competitive business environment, it must avoid being hobbled by high debt, as this may hand advantages to competitors in expanding their market share. Read More