Financial Analysis of Jitterbug Pty Ltd - Case Study Example

Save this file under a name unique to you. Preferably start the file name with your family name and first name and the relevant year and study period. Highlight and delete this message. Financial Analysis of Jitterbug Pty Ltd for Shane Long [Enter the date of submission] prepared by [Enter your name] Executive Summary Jitterbug Pty Ltd is a company which provides jazz music, concerts along with prints, posters, books and branded clothes. Shane Long who is the owner of the company is looking towards upgrading the club so that the financial performance improves. To ensure the up-gradation of the company Shane Long is looking towards a loan from the based on the past performance of Jitterbug Pty Ltd. The report looks into various analyses by concentrating on profitability, liquidity and financial stability of Jitterbug Pty Ltd. The report also looks into the horizontal and trend analysis over the past years to provide information regarding the performance of Jitterbug Pty Ltd. The report shows that Jitterbug Pty Ltd has showed consistency in performance and has improved in 2010 as compared to 2009 but needs to further improve its performance to match industry standards. The report also presents that the management needs to change its policies so that it is able to match the industry. Finally, the report suggests that Shane Long can look forward for a loan which will help them to improve their up-gradation process and improve their performance. Contents Introduction Background: Jitterbug Pty Ltd is a company which provides live music, jive club, concerts, prints, posters, books and other branded clothes. The company has been performing well but the owner Shane Long is looking towards an up-gradation of the company so that the financial performance improves further. To ensure that the up-gradation process goes through Shane Long is looking towards a loan from the bank based on the past performance of Jitterbug Pty Ltd. This has made Shane Long consider into the financial analysis of Jitterbug Pty Ltd as it will help to improve the planning, budgeting, monitoring of the performance of the company (Micro Strategy, 2010). This will help to identify the areas that they need to work upon. Purpose of the report: To identify the performance of Jitterbug Pty Ltd over the past few years so that on the basis of it the bank can decide whether it would be correct to provide Jitterbug Pty Ltd a loan of $600,000. This will thereby help to ascertain the risk involved and take decision based on it. Scope: The report looks into different aspect of financial planning but doesn’t consider the changes in inflation, technology, government policies, economic effects and comparison with competitors while evaluating the performance. Profitability The profitability ratios will help the bank to evaluate the performance of the past years and help them in taking decision regarding the loan of $600, 000. Some of the ratios in that direction are Return on Assets: It is the profit generated on the use of assets (Friedlob & Schleifer, 2003). This helps to evaluate the effectiveness in the use of assets. The results show consistency and improvement of performance over the years. This is substantiated by the trend and horizontal analysis which shows growth in profits and assets highlighting efficiency in performance. Return on Shareholder Equity: Return on shareholder equity is said to be the final profits which attributes to the shareholders of the company. The ratio highlights improvement in return for shareholder highlighting the growth in profits which has ensured that the equity holders are receiving a higher return over years. The trend and horizontal analysis supports this as it shows improvement in performance over the years. Price Earnings ratio: It is calculated as the market price of share based on the earnings per share (Summers & Smith, 2010). The company has a high P/E ratio suggesting that the paying out ratio for the company is sound which shows that the company is efficient in paying its obligations. Dividend Ratio: The dividend ratio shows a slight dip but the dip is not substantial suggesting that the company is looking towards using the resources for development of the company. This is supported by the trend analysis which shows that the company has saved money to plough it back in the business to ensure better returns in the future. The overall analysis for Jitterbug Pty Ltd is sound and it shows an opportunity to invest in. Moulding the process and upgrading the club will help to increase the flow of customers and will improve the performance of Jitterbug Pty Ltd. This makes the company a good company which can avail the loan from the bank. Liquidity Looking into the liquidity ratios helps to find out the ability of the firm to pay its short term obligations and maintain liquidity in the organization (Financial Modelling Guide, 2010). The ratios are as Current & Quick Ratios: This ratio helps to find out the short term obligations and helps to find out the liquidity position of the firm (Mehar, 2005). A look at the current and quick ratio shows that the performance of Jitterbug Pty Ltd has dipped over the years. This is an area of concern and makes the chances of recovering money a bit risky. On the overall basis the ratio is sound as its over 2 but a continuous dip over years is an area to look for. The quick ratio shows a further dip highlighting high inventories which is again an area of concern. On the overall basis and standalone basis for 2010 the ratio is fine but over the years it has dipped which is an area of concern. Account Receivable: It is the time and number of days Jitterbug Pty Ltd takes time to recover money from its customers (Kennon, 2010). Jitterbug Pty Ltd has been consistent in this ratio and has been able to recover its dues. This reduces the chances of bad debts. There are still some areas which Jitterbug Pty Ltd needs to work upon so that the collection process is faster and chances of bad debts reduce. Inventory Turnover: It is the number of times stock is rolled over in a year (Summers & Smith, 2010). The ratio shows consistency but is very low compared to the industry average. This is an area which shows inconsistency and needs to be looked upon. Since Jitterbug Pty Ltd revolves its inventory slow it results in parking of money in the inventories which has affected other ratios and has hampered the liquidity of Jitterbug Pty Ltd. The overall liquid position of the company is sound and shows consistency. There are areas where Jitterbug Pty Ltd needs to work on so that they are able to improve their performance and getting a loan and upgrading their club will help to initiate the process and improve the overall working condition. Financial Stability This ratio has a lot of relevance to the bank that provides loan as it helps to understand the capital structure of the company. It helps to find out the financing nature of the company and the manner it can improve it (Transtutor, 2010). The ratios are as Debt Equity Ratio: This helps to find out the percentage of debt and equity financing in the company (Transtutor, 2010). The analysis of the ratio shows that the major component of the company is equity. This improves its chances of raising finance through external debt as the component of risk associated with it is less. This makes Jitterbug Pty Ltd a good company to receive loan. Equities and liabilities: The equities and liabilities have both grown and the growth in assets has been compensated by the growth in equity due to addition of profits highlighting efficiency and proper maintenance of assets and liabilities. Interest Earned ratio: The interest earned ratio ha shown a dip in 2010 which shows a reduction id debt. This is a good sign and provides an opportunity for Jitterbug Pty Ltd to ensure that they are able to improve it in future Asset Turnover ratio: The turnover ratio highlights consistency which shows that Jitterbug Pty Ltd has used its assets similarly. A comparison to the industry average shows a slight dips which needs to be worked upon. Improving on it will help to improve the performance and ensure better returns for the company. The overall financial stability for Jitterbug Pty Ltd is sound. The company has scope for more external debt and the companies ability to revolves its assets and maintain assets and liabilities shows that they have a good prospect of receiving loan from the bank. Conclusion Jitterbug Pty Ltd performance has shown consistency over the years. The assets and liabilities of Jitterbug Pty Ltd has grown and the company have been able to maintain an increase in profits. Also the financial stability of the company shows soundness and makes it a good prospect for raising money through external debt. Jitterbug Pty Ltd needs to work on certain areas like the quick ratio, inventory ratio, debtors receivable and others which are below industry standards. Improving the performance of this ratio will ensure that Jitterbug Pty Ltd is able to ensure better performance. Getting a loan of $600,000 will help Jitterbug Pty Ltd as they will be able to make the required changes in the infrastructure. Along with it Jitterbug Pty Ltd needs to look towards improving the management process which will help them to ensure efficiency in operations. Recommendation Jitterbug Pty Ltd needs to improve its quick ratio, collection from debtors’ ratio, inventory turnover ratio, and interest earned ratio to match industry standards. This will help Jitterbug Pty Ltd to ensure that they are able to improve their performance and ensure that the up-gradation process improves their overall management Jitterbug Pty Ltd has a good chance of raising external debt of $600,000 through bank as there is financial stability and the companies performance has improves. The fact that Jitterbug Pty Ltd will be able to develop its basic infrastructure which will have a direct impact on profits will help Jitterbug Pty Ltd to ensure improvement in performance Jitterbug Pty Ltd needs to ensure that the management process also improves and there is development of different areas so that the overall improvement results in better performance and development of Jitterbug Pty Ltd Appendix – Part C The financial analysis of Jitterbug Pty Ltd shows improvement in performance but the evaluation of the financial analysis doesn’t consider the following. Firstly, the financial analysis doesn’t consider the changes in inflation. This has an important influence on the financial analysis of a company. This is an area if considered will help to gauge the performance of the company in a better way Secondly, the financial analysis doesn’t consider the change in technology. This has an important impact on the performance as development of technology helps to improve the performance of the company. This is an area if looked into will help to evaluate the performance of Jitterbug Pty Ltd in a better way. Lastly, the financial analysis doesn’t consider the comparison wit similar companies having similar capital structure. This is an important aspect and gauging the performance based on it will help to evaluate the performance in abetter way. This will ensure that Jitterbug Pty Ltd is able to identify the performance based on better parameters. Reference List Financial Modelling Guide, 2010, “Liquidity ratios”, retrieved on May 21, 2011 from http://www.financialmodelingguide.com/financial-ratios/liquidity-ratios/ Friedlob G & Schleifer G, 2003, “Essential of Financial Analysis”, 2nd Edition, John Wiley & Sons Ltd Kennon J, 2010, “Analyzing an income statement: Receivable Turnover”, about.com guide, The New York Times Company Micro Strategy, 2010, “Financial Analysis”, retrieved on May 21, 2011 from http://www.microstrategy.com/financial-analysis/ Mehar A, 2005, “Impact of financing on liquidity position of firms”, Journal of Applied Financial Economics, Volume 15, Issue 6, page 425-438 Summers J & Smith B, 2010, “Communication skills handbook”, 3rd edition, John Wiley & Sons Ltd, Brisbane Transtutor, 2010, “Capital Structure Ratios”, retrieved on May 21, 2011 from http://www.transtutors.com/finance-homework-help/dividend-decisions-and-tools-of-financial-planning/Capital-Structure-Ratios.as Read More