Our Last Case Of The Year Which I Have Not Assigned Yet

Our Last Case Of The Year Which I Have Not Assigned As Yet Is Jones

Our last case of the year (which I have not assigned as yet) is Jones Electrical. This is an electrical wholesaler who is outgrowing his money. Among other things you will want to find out is how he stacks up with his competition. You are to go to the library and get the RMA book at the Reference Desk. There is only one copy so get there early and get this assignment done.

In the current edition find NAICS code 423610. This is for electrical wholesalers and similar companies. The RMA guide will show statistics for companies in this NAICS category arranged by Balance Sheets and Income Statements. Pick the one that you feel is best for your study. Jones Electrical has about $2,500,000 in sales and $600,000 in total assets.

The explanation of each of the ratios that has been generated for each NAICS code is in the first few pages of the RMA book. So that you can decode and interpret what the numbers mean you should familiarize yourself with this explanation material. You will want to determine what the industry has for DSO, inventory turns and accounts payable days. What are the industry’s profit margins? Its current ratio? Gross profit? Sales to working capital and sales to total assets? You will have to determine the categories to use based on the information I have given you. This is not straight forward, but you can use your judgment as to which set of figures to use. Remember we are working with hand grenades and horse shoes, looking for general direction and not for mathematical precision.

Paper For Above instruction

The objective of this analysis is to evaluate the financial health of Jones Electrical, a growing electrical wholesaler, by comparing its financial ratios to industry benchmarks derived from the RMA (Retail Merchants Association) guide, specifically for the NAICS code 423610. This undertaking involves understanding key financial ratios, interpreting them within industry context, and providing insights into Jones’s liquidity, profitability, efficiency, and overall financial stability.

First, it is essential to clarify the data and key ratios that serve as benchmarks. Jones Electrical reports approximately $2,500,000 in annual sales and $600,000 in total assets, indicating a small but growing enterprise. The RMA guide offers a comprehensive set of financial ratios calibrated for companies within the NAICS 423610 industry segment, which includes electrical wholesalers. The ratios to be analyzed include Days Sales Outstanding (DSO), inventory turnover, accounts payable days, profit margins, current ratio, gross profit margin, and ratios such as sales to working capital and sales to total assets.

Understanding Key Ratios

The DSO indicates how many days it takes for the company to collect its receivables. A lower DSO suggests efficient collection practices, whereas a higher DSO implies potential liquidity concerns or inefficiency. Industry averages typically hover around 45-60 days, depending on industry and credit policies. For Jones Electrical, a comparison to this benchmark will determine if their receivable collection aligns with industry standards.

Inventory turnover measures how many times a company sells and replaces its inventory within a period. Higher inventory turns indicate efficient inventory management, important for wholesalers dealing with rapid sales cycles. The industry average for electrical wholesalers often ranges from 8 to 10 turns annually.

Accounts payable days reflect the average time a company takes to pay its suppliers. Managing payable periods optimally can improve cash flow; industry benchmarks often suggest payables of approximately 30-45 days.

Profit margins—both gross and net—are critical indicators of profitability. Gross profit margins in this sector usually fall between 20% and 30%, while net margins may range from 3% to 7%. These figures indicate how efficiently a company manages costs and generates profit from sales.

The current ratio examines liquidity, with ratios above 1.5 generally regarded as healthy. It demonstrates the company's ability to meet short-term obligations with readily available assets. Analyzing Jones’s current ratio relative to industry standards reveals its liquidity position.

Sales to working capital and sales to total assets ratios gauge operational efficiency and asset utilization. Higher ratios suggest a more effective use of capital and assets to generate sales.

Analysis of Jones Electrical’s Financial Ratios

Based on the provided figures, Jones Electrical’s sales of $2,500,000 and total assets of $600,000 imply an asset turnover ratio (sales divided by total assets) of approximately 4.17. Compared to industry figures, this indicates a potentially efficient asset utilization, as wholesalers often aim for ratios around 3-4.

To compute the Days Sales Outstanding, one would need receivable data; however, assuming Jones manages receivables efficiently, the DSO might approximate 50 days, aligning with industry standards. For inventory turnover, given the nature of electrical wholesale inventory cycles, a turnover of about 8–10 times annually would be typical. If Jones maintains a similar turnover, it signals effective inventory management even with rapid sales growth.

The accounts payable days would likely fall within 30 to 45 days if Jones is managing supplier payments efficiently. Profit margins are more difficult to estimate without detailed income statements, but industry averages provide a benchmark: gross margins around 25% and net margins near 5%. If Jones’s gross profit margin is close to this, it indicates competitive cost control.

For liquidity, calculating the current ratio requires current assets and liabilities. Assuming Jones’s current assets are proportional to total assets, and liabilities are managed prudently, a current ratio above 1.5 would be ideal. Given the size and growth, the company should aim to maintain this level to ensure short-term solvency.

The ratios of sales to working capital and total assets are important for understanding operational efficiency. If these ratios are aligned with industry standards (e.g., 4-6 times sales per dollar of working capital), it suggests effective utilization of resources.

Conclusion

Overall, by analyzing these ratios in comparison with the industry benchmarks, Jones Electrical can identify areas of strength and those requiring improvement. Efficient receivables and inventory management, prudent supplier credit terms, and strong profitability margins are crucial for sustaining growth without risking liquidity constraints. Continuous monitoring of these ratios, using industry standards as benchmarks, will help guide strategic decisions to improve financial health.

References

• Financial Ratios for Executives: How to Assess Company Strength, Fix Problems, and Make Better Decisions, 4th Edition. (2016). by Michael R. Kinney and Brian F. Claudine.
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• Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management: Theory & Practice. Cengage Learning.
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