Question

Review the financial statements for Jones Inc. and the comparative financial ratios for the year-end review. Enter your calculations and written analysis directly into the template, and show or explain your work where appropriate.

Problem 1. Calculate the firm's 2015 financial ratios for liquidity, activity (asset management), leverage (debt), and profitability.

Problem 2. Analyze the firm's performance from both time-series and cross-sectional points of view using the key financial ratios provided in the template.

Problems 1 and 2
BALANCE SHEET		2015					INSTRUCTIONS: Analyze the firm's performance from both time-series and cross-sectional points of view using the key financial ratios provided. PROVIDE YOUR WRITTEN ANALYSIS IN THIS COLUMN.
Assets
Cash and Equivalents		$         237,500.00
Accounts Receivable		$         592,500.00
Inventory		$         607,500.00
Total Current Assets		$     1,437,500.00
Gross Fixed Assets	$     1,250,000.00
Less Accumulated Depreciation	$         187,500.00
Net Fixed Assets		$     1,062,000.00
Total Assets		$     2,500,000.00
Liabilities and Equity
Current Liabilities
Accounts Payable		$         222,500.00
Notes Payable		$         422,500.00
Accruals		$         217,500.00
Total Current Liabilities		$         862,500.00
Long Term Debt		$         470,000.00
Total Liabilities		$     1,332,500.00
Stockholder's Equity
Common Stock		$         637,500.00
Retained Earnings		$         530,000.00
Total Stockholders Equity		$     1,167,500.00
Total Liabilities & Equity		$     2,500,000.00
INCOME STATEMENT
Sales Revenue		$     3,360,000.00
Cost of Sales		$     2,724,960.00
Gross Profits		$         635,040.00
Less: Operating Expenses
Selling Expense	$         251,200.00
General S&A	$         163,200.00
Depreciation	$           48,000.00
Total Operating Expenses		$         462,400.00
Total Operating Profit		$         172,640.00
Less: Interest Expense		$           31,200.00
Net Profits Before Taxes		$         141,440.00
Less Taxes (40%)		$           56,576.00
Net Profits After Taxes		$           84,864.00
LIQUIDITY RATIOS		2013	2014	2015	Industry Average
Current Ratio		1.5	1.7		1.6
Quick Ratio		0.9	1		0.9
Operating Cash Flow		n/a	n/a
ASSET MANAGEMENT RATIOS		2013	2014	2015	Industry Average
Inventory Turnover		6	5		8.4
Average Collection Period		40	50		40
Fixed Asset Turnover		n/a	n/a
Total Asset Turnover		1.5	1.5		1.75
DEBT MANAGEMENT RATIOS		2013	2014	2015	Industry Average
Debt Ratio		60%	56%		50%
Times Interest Earned		2.5	3.5		4
PROFITABILITY RATIOS		2013	2014	2015	Industry Average
Gross Profit Margin		20%	19.70%		20%
Operating Profit Margin		4.70%	4.80%		6%
Net Profit Margin		2%	2.30%		3%
Return on Investment		3.00%	3.50%		5.25%
Return on Equity		7.50%	7.95%		10.50%
End of worksheet

Answer 1

Liquidity Ratio		Formula		2015	Notes:
	Current ratio:	Current assets/Current liabilities=	=1437500/1332500=	1.1	Current Ratio here indicates that the firm is have a break even capacity to meets its liabilities. Thus is not supposedly healthy but as compared to industry standards, can be said better.
	Quick ratio:	(Current assets-Inventory)/Current liabilities=	=(1437500-607500)/1332500=	0.6	Working capital is less available as compared to industry standards, The firm should try to release its wc captured in inventory and debtors.
	Operating Cash Flow:	(EBIT x (1-T)+Depreciation=	=(462400*(1-0.40))+48000=	$ 325,440	Operating Cash flow refers to a stream of revenue or expense that alters a cash account over a specified time frame. Free cash flow (FCF) is a measure of a business's financial performance. It is calculated as the difference between cash flow and capital expenditures
	FREE Cash Flow:	Operating Cash flow-Capital expenditure=			FCF helps firm determine its return against any change in capital expenditure.
Asset Management Ratios:
	Inventory Turnover:	Cost of Goods Sold/Inventory=	=2724960/607500=	4.5
	Receivables Turnover:	Sales revenue/Average Accounts receivable=	=3360000/592500=	5.7
	Average Collection Period:	365/Receivables Turnover=	=365/5.7=	64 days
	Fixed Asset turnover:	Total Sales/Fixed Assets=	=3360000/1062000=	3.2
	Total Asset Turnover:	Total Sales/Assets=	=3360000/2500000=	1.3
Debt management ratios:
	Debt Ratio:	Total Liabilities/Total Assets=	=1332500/1437500=	0.9
	Time Interest earned:	EBIT/Interest Expense=	=172640/31200=	5.5
Profitability Ratio:
	Gross Profit Margin:	Gross Profit/Sales=	=635040/3360000=	19%
	Operating Profit Margin:	Operating profit/Sales=	=172640/3360000=	5%
	Net Profit margin:	Net Profit/Sales=	=84864/3360000=	3%
	Return on investment:	Net Profit/Investments=	=84864/(2500000-530000-217500)	5%
	Return on Equity:	Net Income/Shareholder's Equity=	=84864/1167500=	7%
Sustainable Growth rate:		ROE x Retention rate=	=7% x 40%=	2.8%
		where,
		Retention Rate= 1 - Dividend pay-out ratio=	1-.60=40%
	By looking at the ratios obtained against the industry standards, the company seem to manage its operations at break even costs.
	Although in comparison to past 2 years, has managed to sustain its growth.