Financial Management-Huaihai Cohort- Team 9
This analysis is based on the 5 questions to the case. We believe that answering them builds a rather exhaustive and clear picture of the state of Jones’ business and its strengths and issues and offers a good analysis of its current state. Question A) How well is “Jones Electrical Distribution” performing? What must Jones do well to succeed? Jones Electrical Distribution is electrical supplying company. Since it was established in 2004, the sales have been growing steadily on a year to year basis from $1624000 in 2004 to $2224000 in 2006, and furthermore a projected $2.7 million in sales for the current financial year of 2007.In the same time profit has been inadequate for the quantity of sales. This data is backed by the very low Profit Margins experienced by the company, most recently only 1,3% (and only 0.8% for the first quarter of 2007).As of late, the company has faced a cash shortage and the results of that are becoming evident on its financial statements. Accounts payable have increased dramatically comparing 2006 and 2007. The same situation is with accounts receivables, showing that less of Jones’ clients are willing to pay cash for goods delivered. As a result the use of a discount thanks to fast payment to suppliers has become improbable. Further study of the increase in important components such as accounts receivables and inventory will be discussed in the 3rd section of this case analysis. Here are some vital ratios in analysis the company’s performance: ROA=NI/Total Assets; ROA=2.3% for 2004, 4.3% for 2005 and 3.8% for 2006, which means what the profit is per dollar of assets and indicates the Jones doesn’t utilize the assets in an efficient manner. ROE= NI/Total Equity; ROE=7.6% for 2004, 13.62% for 2005 and 12.35% for 2006. This ratio indicates that for every dollar in equity Jones Electrical Distribution generates 0.07, 0.13 and 0.12 cents in profit for 2004, 2005 and 2006 respectively. To improve the ratio indicators the firm has to increase the Net Income. Profit Margin=NI/Sales; PM=0.8% for 2004, 1.5% for 2005 and 1.3% for 2006. Profit Margin for the Jones Electrical Distribution is extremely low. Jones should take advantage of sales discounts. Debt Equity Ratio=Total Debt/Total Equity= 2.19 times for 2004, 2.12 for 2005 and 2.22 times for 2006. The ratio is showing us the liabilities keep growing. While analyzing the ratios’ indicators it is becoming clear that Jones managed the company more successfully in 2005. Perhaps this is helped by the fact that he used all the discounts from suppliers. It is very essential for Jones Electrical Distribution to leverage the net income, which is impossible to do without decreasing the costs of running the business.
Jones Electrical Distribution seems to be a company based on a good sales team who take are bringing about a very steady yearly growth of between 17% and 18%. This quite remarkable number seems to show an ambition and dedication and profit despite small has also grown at a tempo that seems to slow down unlike that of sales. So it seems that Jones has to try to act to his strengths by supporting the good work of his sales team, but in the meantime the main problems seems to be connected to the Profit Margin. The EBIT of the company or in other words the expenses of making a sale are possibly too high and stifle the growth opportunity and cause a need for external financing. This would be hard to maintain for very long especially for a business of that size. Jones has to try to minimize costs and increase his cash collection as it has been lagging as well. The cash injection of the new line of credit will be a breath of relief but not a long term solution. So only combining the aforementioned measures will allow a thriving business like Jones’ to secure a good balance between reducing EFN and not hindering growth. These points will be further discussed as...