Case Study 1 Bus 530 Financial Management

Case Study 1 Bus 530 Financial Managementjoshuawhitetechnologies

Perform a ratio analysis for 2017 and 2016 and then answer questions a, b, c below. Analyze Joshua & White Technologies’ financial statements, including liquidity, asset management, debt management, and profitability ratios. Compare the company's ratios over the two years and against industry averages. Based on this analysis, evaluate whether the company's liquidity position has improved or worsened, assess its asset management efficiency, and interpret changes in profitability during the last year.

Sample Paper For Above instruction

Introduction

Effective financial management requires comprehensive analysis of a company's financial ratios over time and in comparison to industry standards. Joshua & White Technologies, a mid-sized firm in the technology sector, provides an insightful case to evaluate its financial health for the years 2016 and 2017. This analysis will focus on liquidity, asset management, debt management, and profitability ratios to determine trends, strengths, and areas for improvement within the company's financial structure and operational efficiency.

Liquidity Analysis

Liquidity ratios measure a company's ability to meet short-term obligations. The primary ratio, the current ratio, is computed as current assets divided by current liabilities. For 2016, Joshua & White reported current assets of $127,240,000 and current liabilities of $50,480,000, resulting in a current ratio of 2.52. In 2017, current assets increased to $161,259,000, and current liabilities rose to $66,129,000, yielding a current ratio of approximately 2.44. Both ratios are close to the industry average of 2.58, although a slight decline is observable.

This marginal decrease suggests a slight deterioration in liquidity, but the company's current ratio remains above the industry average, indicating it retains sufficient liquidity to cover short-term liabilities. The company's ability to generate enough current assets relative to its current obligations has not significantly changed, though monitoring for potential liquidity pressures is advisable.

Asset Management Efficiency

Asset management ratios assess how effectively management utilizes assets to generate sales. Inventory turnover is a critical metric, calculated as COGS divided by inventories. In 2016, inventory turnover was $300,000,000 divided by $56,000,000, approximately 5.36 times. In 2017, inventory turnover increased to $420,000,000 divided by $84,000,000, equaling 5 times, reflecting a slight decrease, despite higher sales.

Days sales outstanding (DSO) measures accounts receivable collection efficiency. DSO for 2016 is (accounts receivable / sales) multiplied by 365= ($48,000,000/$400,000,000)*365 ≈ 44 days, aligning closely with the industry average of 47.45 days. In 2017, DSO decreases to roughly 45 days, indicating slight improvement in receivables collection efficiency.

Overall, asset management efficiency indicates stable management of receivables with a marginal decline in inventory turnover, likely linked to increased inventory levels necessary to support higher sales. The company’s ability to manage assets has remained relatively stable across these years.

Debt Management

The debt ratio indicates the proportion of assets financed by debt. For 2016, total debt was $108,800,000, and total assets were $327,240,000, resulting in a debt ratio of approximately 33.3%. In 2017, total debt increased to $133,791,000, while assets grew to $379,659,000, lowering the debt ratio to around 35.3%. Both figures exceed the industry average of 20%, indicating that Joshua & White relies more heavily on debt than industry peers. The slight increase suggests rising leverage, which could pose risks if earnings decline or interest rates rise.

Profitability Analysis

Profitability ratios reveal how effectively the company converts sales into profits. The profit margin is calculated as net income divided by sales. For 2016, net income was $34,524,000 on sales of $400,000,000, yielding a profit margin of approximately 8.63%. In 2017, net income increased to $40,200,000 on sales of $420,000,000, resulting in a profit margin of approximately 9.57%. This improvement indicates increased efficiency in managing costs relative to sales.

Return on assets (ROA) is net income divided by total assets. In 2016, ROA was $34,524,000/ $327,240,000 ≈ 10.55%. In 2017, ROA increased to about 10.58%, reflecting slight growth in asset utilization efficiency. Return on equity (ROE) is net income divided by shareholders' equity, which rose from roughly $218,440,000 to $245,868,000, increasing ROE from approximately 15.81% to 16.33%, consistent with positive profitability trends.

Conclusions and Recommendations

Analysis indicates that Joshua & White Technologies experienced a marginal decline in liquidity but still maintains a healthy current ratio relative to industry norms. Asset management efficiencies are stable, with slight improvements in receivables management. Profitability has slightly improved, with higher profit margins and returns on assets and equity. However, increased leverage warrants caution.

To further strengthen financial health, management should focus on improving liquidity, possibly through better working capital management. Additionally, reducing reliance on debt could mitigate financial risk. Enhancing inventory turnover and receivables collection practices could further optimize asset utilization. Overall, the company's financial position remains solid, with prudent management necessary to sustain growth and performance.

References

  • Brigham, E. F., & Houston, J. F. (2019). Fundamentals of Financial Management (15th ed.). Cengage.
  • Gibson, C. H. (2018). Financial Reporting & Analysis (13th ed.). Cengage Learning.
  • Ross, S. A., Westerfield, R. W., & Jordan, B. D. (2018). Fundamentals of Corporate Finance (12th ed.). McGraw-Hill Education.
  • Higgins, R. C. (2018). Analysis for Financial Management (11th ed.). McGraw-Hill Education.
  • Investopedia. (2023). Financial Ratio Analysis. https://www.investopedia.com/terms/f/financialratio.asp
  • SEC. (2022). Forms 10-K and 10-Q: Understanding Financial Statements. U.S. Securities and Exchange Commission. https://www.sec.gov
  • Morningstar. (2023). Industry Averages and Business Ratios. https://www.morningstar.com
  • Bloomberg. (2023). Market Data and Company Financials. https://www.bloomberg.com
  • Yahoo Finance. (2023). Stock Market and Financial Data. https://finance.yahoo.com
  • Strayer University. (2023). Course Resources on Financial Management. Strayer Library.

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