Jones Electric Case Study

Jones Electric Case Study Part 1

When looking at the ratios computed for Jones Electrical Distribution, the trends across the years of 2004, 2005, and 2006 can explain some strengths and issues happening within the company. All ratios are seen in the table below.

Table 1

Jones Electrical Distribution and Industry Ratios

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When looking at the current ratio, the numbers show that there is an increasing trend. This is showing that the overall assets to liabilities are evening out. As Jones decreases its cash, increases its inventory, and increases its accounts payable and line of credit, the more you can see that the company will be less and less capable of paying its obligations if the value continues to decrease. When comparing the industry standard to the most current value in 2006, the two values are showing that the company is relatively normal in this area, though the trend downward is not a good sign of its financial health.

Looking now at the quick ratio, there is also a downward trend seen. The low numbers below show that the current liabilities, especially their line of credit payable debt and disappearance of cash, is dragging down their ability to pay off short term obligations without relying on the sale of inventory. Though somewhat close to the industry data standard, both have value below one showing that they would need to liquidate inventories in order to pay off liabilities. This is a weakness that could result in missed or slow payments from Jones when it comes to bank loans.

The trend for the A/R turnover ratio shows an increase over the period of time. This shows that Jones can turns its A/R into cash about 8 times a year. It shows that Jones is relatively efficient when it comes to collecting sales from customers, making them more liquid in nature. Currently, Jones and the industry standard are about equal in this ratio, making it so that is on pare with how often they are converting sales into cash.

For the days sales outstanding ratio, the trend seen is pretty steady, going up and down by one every year. This high value shows that the number of days’ sales are tied up in receivables is high and must wait 43 days after the sale before receiving cash. Though looking like a high value by itself, compared to the industry standard, it is lower than normal, showing that Jones is slightly better at having customers pay on time and thus may have better finance stability when it comes to their receivables.

Looking at the inventory turnover ratio, the trend is currently going downward, showing that each item of inventory is sold out and restocked 4.8 times a year, which is a weakness in that Jones not turning over product as fast as they should. Comparing this to the industry standard, it’s quite low value suggests that Jones is holding too much inventory and that can add to net operating capital. It creates speculation if the firm is holding obsolete goods not worth their stated value.

The days sales in inventory ratio shows the trend that that it is increasing and has a fairly high value. This shows that it will take Jones 76 days to sell all of its inventory. This weakness makes it so that inventory is seen as less valuable, as old inventory is always less valuable. It also shows the liquidity of the inventory is low, and that because it is not being sold fast, the liquidity of the inventory is low. Compared to the industry standard, it has an alarming high ratio, making it so that the cash flows of these companies are better than Jones and that are free to better invest their money into profitable areas.

For the accounts payable turnover ratio, the trend of a sudden decrease is seen. This value of 15.2 shows that Jones can pay off its average accounts payable balance that much during the year. This sudden decrease shows the decrease liquidity of the company and that they cannot easily pay off their suppliers as easily as before. However, when compared to the industry standard of 10, Jones has strength in this area and is doing better than similar companies. Despite the advantage and appeal over other companies, its sudden drop in this ratio may hint to future drops and issues.

The days in payables ratio shows the trend of increasing values, with a large jump currently to the value of 24. This shows that it takes 24 days for Jones to pay back trade creditors, including suppliers. This sudden trend shows that Jones is moving away from paying suppliers quickly in order to save on free cash flow and working capital, freeing up cash to help with areas elsewhere in the company. They are also paying more for their suppliers as Jones is missing out on the discount suppliers give for timely payments. When looking at the industry standards, Jones value is quite less than the standard of 36, meaning that Jones is better than most companies at paying suppliers quickly and giving up cash flow. With their current trend of increasing length between supplier payments, however, this might continue and free up their cash flow further.

The trend seen in the times interest earned ratio shows that the value is increasing and staying level currently at 2.472. This shows that Jones’ income can cover interest expenses 2.472 times in the future. This low number highlights the weakness that Jones can only afford to cover its expenses a minimal amount of time due to its low EBIT. When compared to the industry standard of 5.1, this demonstrates that Jones cannot afford to pay interest payments like its competitors can. This makes the company a higher credit risk and that its competitors are more likely to get loans than them.

Looking at the debt to equity ratio, the trend of the data shows that the value was quite high then went low and stayed at a steady value near 18. This high value shows the weakness that more bank loans are used than investor financing. This large number signifies that the business is not financially stable and that investors did not fund operations as much as creditors have. When compared to industry standards, Jones’ value is so larger that they need to be extremely concerned with how much control creditors have within the future of their company when it comes to expenses.

The fixed asset turnover ratio is trending upward, showing that the operating performance is increasing, with the ability to generate net sales from fixed asset investments increasing. This shows that Jones continual increase in property and equipment investment is more effectively generating revenue. When compared to industry standard however, the number is quite low and Jones is at half the investment efficiency in fixed assets when looking at competitors and will have a harder time making a return on investment. As Jones is a manufacturing company, this ratio is of more relevance and holds weight in this industry.