FINANCIAL MANAGEMENT

Case study - JAEDAN INDUSTRIES

Submitted by:
Ankit Gupta
13066
Section B

Income Statement
 For the year ending December 31, 2007

Sales 4,20,00,000
Cost of Goods Sold 2,64,60,000
Gross Profit 1,55,40,000
Operating Expenses:  
Selling, General and Administrative 16,21,000
Depreciation 8,00,000
Earnings before interest and taxes 1,31,19,000
Interest Expense (10% on notes payable+bonds) 3,75,200
Earnings before taxes 1,27,43,800
Taxes 43,32,892
Net Income 84,10,908
Dividends paid 21,02,727
Addition to Retained Earnings 63,08,181
Statement of Retained Earnings

For the year ending December 31, 2007

16,28,81
Retained Earnings balance from beginning of year 9
84,10,90
Plus: Net Income for 2006 8
Less: Cash dividends paid during 2006  
Preferred Stock 8,000
21,02,72
Common Stock 7
21,10,72
Total dividends paid 7
79,29,00
Retained earnings balance (December 31, 2007) 0
 Balance Sheet

December 31, 2007

Assets

Cash 36,89,000
Marketable Securities 18,36,000
Accounts Receivable 54,23,000
Inventory 41,18,000
1,50,66,00
Total Current Assets 0
1,48,11,00
Fixed Assets 0
Less: Accumulated Depreciation 59,60,000
Net Fixed Assets 88,51,000
2,39,17,00
Total Assets 0

Liabilities and Equity

Accounts Payable 31,36,000

Notes Payable 7,06,000
Accruals 5,00,000
Total Current Liabilities 43,42,000
Long-Term Bonds 30,46,000
Preferred Stock 1,00,000
Common Stock (at par) 40,00,000
Paid-in capital in excess of par 45,00,000
Retained Earnings 79,29,000
2,39,17,00
Total Liabilities and Equity 0

Statement of Cash Flows

For the year ended December 31, 2007

Cash flow from operating activities:

Net income 84,10,908

Depreciation 8,00,000
Increase in Accounts Receivable 25,55,500
Increase in Inventory 9,08,000
Increase in Accounts Payable 1,90,000
Increase in Accruals 1,50,000
Cash provided by operating activities 60,87,408
 Cash flow from investment activities

Increase in gross fixed assets -2,932000

Cash provided (consumed) by investing activities -2,932000

Cash flow from financing activities

Increase in notes payable 22,000

Dividends paid:  

Preferred -8,000

Common -21,02,727

Cash provided by financing activities 20,88,727

Net increase in cash and marketable securities 1066681

Ratios:

  Jaedan Industry
  2006 2007 2006 2007
Liquidity Ratios
Current Ratio 2.65 3.47 2.89 3.26

(Current Assets / Current Liabilites)        

Quick Ratio 1.84 2.52 1.42 2.19

(Quick Assets / Current Liab-Bank od)        

         
Activity Ratios
Inventory Turnover 8.41 6.43 6.71 6.59
(Cost of Goods Sold/ Avg Inventory)        
Average Collection Period 27.13 47.13 35.12 36.17
(360 Days /DTR)        
Average Payment Period 53.09 57.68 50.73 49.63
(360 Days / CTR)        
Fixed Asset Turnover 5.74 4.75 4.32 4.76
(Net Sales / Avg Net Fixed Assets)        
Total Asset Turnover 2.24 1.76 2.14 2.33
(Net Sales / Avg Total Assets)        
 Debt Ratios
Debt-Asset Ratio 40.72% 30.89% 41.93% 39.36%
(Debt / Asset)        
Assets-to-equity 170.35 145.58 165.82 163.13%
% % %
(Assets / Equity)        
Debt-to-equity 29.78% 18.43% 31.26% 30.23%
(Debt / Equity)        
Times Interest Earned 26.33 34.97 15.72 16.81
(PBIT / Debt Interest)        
Profitability Ratios
Gross Profit Margin 30.00% 37.00% 22.19% 23.74%
(Gross Profit/ Net Sales)        
Operating Profit Margin 25.59% 31.24% 19.32% 20.89%
(Operating Profit / Net Sales)        
Net Profit Margin 16.25% 20.03% 15.11% 17.97%
(Net Profit/ Net Sales)          
Earnings per share $6.27 $8.41 $4.36 $4.58
(Equity Earnings/ No. of Eq Sh Issued)        
Return on total assets 36.29% 35.13% 32.34% 41.87%
(PAT / Total Assets)        
Return on common equity 61.81% 51.15% 53.63% 68.30%
(PAT/ Avg Equity)        
Market Ratios
Price/Earnings ratio 6.84 6.76 5.41 5.97
(Market Price per Share/ EPS)        
Market/book ratio 4.23 3.46 4.19 4.32
(Market Value per Share/ Book Value)        

Analysis of Financial Ratios:

Liquidity Ratios: Jaedan has improved its Current Ratio to above the industry in the current year. Its
Quick Ratio is also higher. Firms having good liquidity ratios usually invest in long term assets,
though

Activity Ratios: Jaedan’s Inventory Turnover was substantially higher than the Industry in 2006 but
it is now slightly lower than the industry average. This suggests that it is now keeping its inventory
for few days more each year and it is more in line with the industry at this point. One serious
problem for Jaedan is its Average Collection Period (ACP) has almost doubled. It is now substantially
above the 35 days that it allows its customer before payment is due and is considerably higher than
the industry average. Additionally, Jaedan is now taking longer to pay its suppliers as the Average
Payment Period has increased by approximately 4.5 days. Jaedan’s suppliers offer Jaedan 45 days to
pay its Accounts Payable—on average Jaedan is taking almost two weeks longer than that to pay (in
2006). This may have already resulted in a lower credit rating for the company. With respect to the
turnover ratios, Jaedan has experienced a reduction. This is due, in part to the fact that Fixed Assets
increased by almost $3,000,000 to handle the increase in sales.

Debt Ratios: Jaedan’s Debt Ratio has decreased significantly from 2006’s value; however, this is not
due to the fact that the firm has significantly reduced its debt, but rather to the fact that the firm’s
Total Assets are substantially higher. The firm’s Assets-to-Equity ratio has dropped a great deal,
because the firm has experienced a larger rate of growth in its Retained earnings than in its Total
Assets. Debt-to-equity has dropped substantially from 2006. Jaedan Industries is in a better position
with debt ratios than the industry.

Profitability Ratios: With respect to all three profit margins, Jaedan has improved in 2007 over
2006, as has the industry. Jaedan is consistently outperforming the industry in converting its sales
dollars to profit. The firm’s EPS has experienced a hefty increase, again due to the large increase in
Net Income. Return on total assets has decreased slightly because the increase in Net Income was
not as large as the increase in Total Assets. The same situation applies to Jaedan’s Return on
Common Equity. The opposite has occurred with the Industry.

Market Ratios: Jaedan’s P/E ratio and Market/Book ratio have dropped. This suggests that the
market is not willing to pay as high of a multiple over earnings or book value as they have been
willing to pay in the past. Jaedan is still higher than the industry with respect to the P/E ratio but it is
now lower than the industry with respect to Market/book value.

DuPont Analysis: DuPont analysis allows us the ability to isolate why the firm’s Return on Assets
(ROA) changed. In Jaedan’s case, ROA dropped from 36.29% to 35.13%. As you can see from the
calculations below, this is due to the lower Total Asset Turnover (TATO), as the firm’s Net Profit
Margin (NPM) actually increased.

ROA = NPM x TATO

2005: .1625 x 2.24 = 36.4%

2006: .2003 x 1.76 = 35.25%

DuPont analysis also lets us determine why the firm’s Return on Equity (ROE) changed. Jaedan’s ROE
dropped from 61.81% to 51.15%. This change was mainly due to the lower assets-to-equity ratio.
The firm’s maintenance of approximately the same level of debt to the absolute increase in equity in
a period of increasing profitability has resulted in lower ROE.
ROE = ROA x A/E

2005: .3629 x 1.7035 = 61.82%

2006: .3513 x 1.4558 = 51.14%