Jones Electric Case Study

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The total asset turnover ratio shows a trend of increasing values, though the change is small and relatively steady. This ratio value shows that Jones can efficiently uses its assets to generate sales. Increase in sales over years have been more than the increase in total assets and that $2.86 of sales are generated for $1 of asset. When compared to the industry average, Jones is slightly less but only by a marginal value. Because of this, Jones strengths lie with its efficiency of asset usage and that it is on pace with company standards, with its increasing trend suggesting it will eventually meet those standards.

For the return on equity ratio, the trend seen is a little bit of a decrease in the most current year. The value for ROE is extremely high, at over a hundred percent, showing that the profit each dollar of common stockholder’s equity generates is very high. This is due to the equity being equal to the net income, as the company is only owned by one person and does not sell shares. As money is only coming from one, small source (in the form of reinvesting), it is using the funding effectively. When compared to the industry standard, it is above and beyond their numbers, probability due to competitors having more shares and shareholders. While being able to more effectively use money to generate profit, other companies can rely on shareholders for funds.

Finally, the return on assets ratio is seen to trend up, then being more steady in the most current year. This value shows that Jones somewhat efficiently manages its assets to product profits, and that the investment put into those assets (via equity or debt) was worth doing so. When looking at industry standards, however, Jones is lower than its competitors, showing that its weaknesses lie with its investment in assets when it comes to generating profit, most likely with its rising inventory costs being a part of the issue.

Ratios

2004

2005

2006

Industry Data

Current (TC assets/TC liabilities)

2.140

1.911

1.635

1.7

Quick (TC assets - inven)/TC liabilites

1.045

0.966

0.705

0.9

A/R Turnover net value of credit sales/ average AR

7.773

7.740

8.089

7.9

Days Sale Outstanding (Days in A/R) (AR/(sales/365))

42.000

44.000

43.000

46

Inventory Turnover (COGS/Inventory)

5.368

5.530

4.803

6.6

Days sales in Inventory (365/ Inventory Turnover)

68.000

66.000

76.000

55

Accounts Payable Turnover (COGS/AP)

36.500

36.500

15.208

10

Days in Payables (365/ AP turnover)

10.000

10.000

24.000

36

Times Interest Earned (EBIT/interest)

1.789

2.480

2.472

5.1

Debt to Equity (Total liabilities/ total equity)

29.408

15.750

18.047

1.8

Fixed Asset Turnover (Sales /Fixed Assets)

14.372

18.605

19.001

41.1

Total Asset Turnover (Sales/Total Assets)

2.762

2.884

2.861

2.9

Return on Equity (EBT/Equity)

153.85%

153.85%

153.37%

26.1%

Return on Assets (EBT/Total Assets)

3.59%

6.64%

5.87%

9.0%

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Looking at the cash flows for the years 2005 and 2006, it can be seen that the the overall net cash flows for operations increased from 2005 to 2006. This along with the great increase in accounts payable and decrease in accounts recievable helped the cash flows become positive in the year 2006. It can be seen that Jones is increasing their investment in inventory or are not able to sell old inventory, tying up a lot of their free cash flow. It can also be seen that they are taking longer to pay suppliers and buying more inventory as seen with the great increase account payable, making it so that they are more reliant on liabilities to