Case Analysis Jones Electrical Distribution Jones %lectrical Distribution is a com&an' (hich has several 'ears increasing their sales and making good &ro)ts* At +,,-. the business (as in a shortage o$ cash/ there$ore. the' needed to increase the borro(ings $rom 0he Metro&olitan 1ank to 2+3,.,,, dollars. (hich (as the maximum loan &ermitted b' the bank* Since the com&an' (as gro(ing signi)cantl' $ast. Jones (as in the urgenc' o$ increasing their borro(ings to &a' their assets and cover their o&erating ex&enses* 4n this moment. Jones decides to make relationshi&s (ith 0he Southern 1ank. a ne( bank that allo(ed them to extend their loan to 253,.,,,* 4n order to make the a&&roval o$ the line o$ credit. the bank (ill &roceed to investigate the com&an'*
Jones Electrical Overall Healt !er"orman ce Measures Leverage Li"uidit' se o$ Resources
#atio
Calculations
200$ 200%
2006
Debt to Asset 678 Debt to %"uit' 678 urrent 0imes >uick 0imes
0L90A 0L9%"uit' A9L 6A ? 4nventor'89L
,*-: +*+, +*<= <*,3
,*-; +*<+ <*:< ,*:@
,*-: +*+5 <*-= ,*@<
=+ = <, =
== 3 <, =
=5 += 3
<*; ;7 +7
+*3 <=7 =7
+*3 <+7 =7
DSB 6Da's8 redit Sales 6Da's8 Pa'able Period 6Da's8 redit Purchases 6Da's8 %140 4nterest overage 0imes RB% 7 RBA 7
AR9redit Sales Sales95-3 AP9redit Purchases BCS95-3 %14094nterest &a'ment 49%"uit' 490A %1406
;*37 <5*,7 <5*57 <7 ,7 ,7 ,*,@
L8 4nitiall'. in order to anal'ze Jones com&an'. it should be considered all the &er$ormance measures to conclude i$ the Southern 1ank (ill decide to a&&rove the loan* 1elo(. the ratios to take in consideration*
&everage Debt to Asset From +,,= to +,,-. $or ever' < dollar o$ the com&an' assets. -: cents (ere $unded through liabilities and 5< cents (ere )nanced b' e"uit'* 4n +,,3. it (as almost the same. (hich means Jones business is mainl' $unded b' bank loans (hich are almost -:7 o$ the )nances and just his &ersonal ca&ital investment* 4t is )ne $or a gro(ing business to get $unded b' loans but in the $uture it has to be $unded through %"uit' as (ell because this has increased Jones liabilities (hich leads to larger interest &a'ments* Debt to E'uity 4n +,,=. $or ever' < dollar o$ Jones e"uit'. +*+, dollars (ere raised through liabilities and this $ell to +*<+ in +,,3 but increased to +*+5 in +,,-* 0his means the com&an' is running on bank loans mainl' as ++,7 o$ e"uit' is being contributed b' liabilities* 4t is suggested that. in order to ex&and the business and to get more )nances $or Jones %lectrical. the com&an' should go $or e"uit' )nancing to get instant cash (ithout incurring interest ex&enses*
&i'ui(ity Jones %lectrical has been reducing its li"uidit' through the last 'ears* From ratios +*<= in +,,= to <*-= in +,,-. (hich is current li"uidit'* 4t ha&&ens similarl' (hen onl' anal'zing the most li"uid assets/ the ratio lo(s do(n $rom <.,3 in +,,= to ,.@< in +,,-* 0his is due to the higher level and indebtedness and the &rogress o$ their increasing liabilities*
)se o" #esources D*O 0he collection &eriod in +,,= (as =+ da's (hich sho(s that Jones electrical allo(s its customers to &a' them in =+ da's a$ter getting their &roducts and it did not change a lot as in +,,3 and +,,- it (as == da's and =5 da's. res&ectivel'* 0his is almost a month and a hal$ time &eriod (hich is more
than enough $or a gro(ing com&an' like Jones* 4n order to gro(. a com&an' needs cash $or o&erating activities and to bu' more o$ the ra( materials* 4n this matter. the com&an' can give added value to its customers so as to make a long term relationshi&* 4t is suggested that the com&an' should lo(er its ollection Period in order to meet the cash re"uirements*
!ayable !erio( 0he &a'able &eriod in +,,= and +,,3 (as <, da's (hereas has increased to += da's in +,,-* !hich sho(s that during the )rst t(o 'ears. Jones (as more to(ards availing the &urchase discounts and saving that mone'* or as. in +,,-. (hen it (as more to(ards borro(ing mone' $rom the su&&liers to invest in order to make cash available $or o&erating activities* 4t is suggested that Jones should choose (isel' (hich is better $or the com&an' but $or a gro(ing com&an' the longer time &eriod $or &a'able (ould be good but not ver' long* E+,T interest Coverage Times %arnings be$ore interest and taxes. or %140. takes a com&an'Gs revenue. or earnings. and subtracts its cost o$ goods sold and o&erating ex&enses* 0he %arnings be$ore interest and taxes. i$ the com&an' can &a' its interest costs* Jones received a loan o$ 2+3,*,,,. in +,,- $rom the Metro&olitan bank* 0he %140 increased $rom +,,= till +,,3 and sta'ed the same $rom +,,3 till +,,-* 0his has to do (ith the shortage o$ cash in +,,-* #eturn on E'uity -#OE. 0o kno( the amount o$ net income that is returned to the shareholderGs e"uit'. it (ould be needed to anal'ze the Return on %"uit' ratio* For +,,-. this ratio is <+*57. (hich means that. $or ever' dollar o$ the shareholdersG e"uit'. the com&an' is making more than <+ dollars* 0he current ratio.<+*57. is lo(er than +,,3. but still ver' good* !e should need to make a $orecast in order to see ho( the ratio is going to behave in the next 'ear* #eturn on Assets -#OA. 0his ratio indicates ho( &ro)table the com&an' is related to its assets. or ho( eHectivel' the' are managing their assets in order to make &ro)ts* 0he return on assets. or return on the investments $or Jones %lectrical in the 'ear +,,- is 5.;+7. (hich is lo(er than the 'ear be$ore 6RBA +,,3 =.5-78* Bn +,,3. the business is managing its assets less eHectivel' than in +,,3*
#eturn on ,nveste( Ca/ital -#O,C. RB4 is an overall &ro)tabilit' $or the om&an'. no matter ho( it is $unded* 0he IReturn on 4nvested a&ital is used to give an im&ression about ho( (ell a com&an' is using its mone' to generate returns* 0he calculation hel&s to determine a com&an'Gs eKcienc' to allocate its ca&ital under its control to &ro)table investments* A high RB4 re(ards com&anies that are able to &roduce the most net o&erating &ro)t (ith the least amount o$ invested ca&ital* Due to this (e can see that JonesG RB4 is increasing ever' 'ear/ there$ore. the com&an' is rentable*
*ustainable rot #atio o com&an' should gro( $aster than their sustainable gro(th rate 6gE8* Bther(ise. the' (ould run out o$ $unds and (ould their borro(ing (ill increase signi)cantl'* 4n this case. as elson Jones is the onl' shareholder o$ the com&an'. the retention rate (ould be <* 0here$ore. the sustainable gro(th (ould be same as the return on e"uit' ratio* For +,,3. the gE (as <=7. although the gro(th rate (as <,@7/ $or +,,-. the gE (as <+.57. but actuall' gre( onl' 5.=7* 0his ex&lains that Jones %lectrical is no( in a huge need o$ more $unds*
E+,T 2@=
2=;
2@@
*ortterm Financing #e'uirements Tra(e Discounts 4$ the com&an' $oregoes trade discounts the' (ill be having a higher li"uidit' $or a certain amount o$ time (hich could be used $or his short?term )nancing re"uirements* Bn the other hand. the business (ill not be able to gro( as $ast as it is (anted (ithout an additional loan or $urther )nancial su&&ort $rom the bank*
*uggestions to te +an3 0o decide (hether giving Jones %lectrical a loan. the bank should be ske&tical* !e suggest the' could re"uire a ver' strict business &lan to the com&an'* !e believe that the com&an' has a great $uture. but at the same time. it is observed that its management has not been accurate and it is also ex&ected that the managers should be stricter about the sustainable gro(th and all the liabilities the' are taking* !e agree (ith the conditions &re? settled b' Rachel Montrose. that limit the &rovision o$ the credit. limiting both the "uantit' 6limit o$ 253,k. (hich (ould be also limited to the @37 o$ the accounts receivable and 3,7 o$ the inventor'8. but also its "uali)cation. as Jones (ould not be able to invest on )xed assets (ithout &revious &ermission o$ the bank. and other (ithdra(al limitations* Also. (e believe. that in order to have a better kno(ledge o$ the accounting o$ the com&an'. (e (ould re"uire Jones %lectrical to re&ort t(ice a 'ear. once &er semester* 4ndeed. the bank could a&&rove the loan. (ith some re"uirements to be asked be$ore?hand. since the signi)cant gro(th the com&an' has had in the last 'ears* Also. should do a revision o$ the businessG )nancial statements. observing ever' 'ear the sustainable gro(th o$ the com&an' and its &er$ormance measures*
