Debt and Jones Electrical Distribution
Jones electrical distribution Case Study (Group 10)
Q 1, How well is “Jones Electrical Distribution” performing? What must Jones do well to succeed?
First Quarter
2004
2005
2006
2007
Sales increase
18%
17%
ROE
7.6%
13.6%
12.3%
2.0%
Sustainable growth rate
7.6%
13.6%
12.3%
2.0%
Profit Margin
0.9%
1.5%
1.34%
0.8%
Assets turnover
2.76
2.88
2.86
0.70 financial leverage
3.20
3.12
3.23
3.49
Shareholder’s equity
31%
32%
31%
29%
From coverage ratio analysis we can see Jones electrical distribution’s business is stable business as a retailer. Sales increase 18% and 17% in 2006 and 2007 respectively, with estimation in 2007 will be 20.4%. Shareholder’s equity is around 30%.
Jones sustainable growth rate: g*=RT*ROA, so compare with actual sales growth, we can make the conclusion Jones well managed its growth through year of 2004 to 2007.
As Jones doing low margin business, so should avoid high financial leverage ratio as interest burden will be heavy.
Q2, why does a business that has profit of $30,000 per year need a bank loan? 2004
2005
2006
First Quarter
2007 collection period
42.0 days
44.0 days
43.0 days
43.9 days payables period
10.1 days
10.0 days
24.1 days
37.4 days
From above table we can find out Jones collection period increased step by step and this will need more cash support that, payables period exceed 10 days from 2006, this will lost 2% discount from suppliers.
As Jones sales growth rate is high than sustainable rate, so its net earning could not support increased account receivable and inventory. Then the company need bank loan to finance the increase business.
Q3, what drove the increase in Jones’s accounts receivable and inventory balances in 2005 and 2006?
Sales growth drove the increase of accounts receivable and inventory balances in 2005 and 2006.
Q4, Is Nelson Jones’s estimate that a $350,000 line of credit is sufficient for 2007 accurate?
As
Q 1, How well is “Jones Electrical Distribution” performing? What must Jones do well to succeed?
First Quarter
2004
2005
2006
2007
Sales increase
18%
17%
ROE
7.6%
13.6%
12.3%
2.0%
Sustainable growth rate
7.6%
13.6%
12.3%
2.0%
Profit Margin
0.9%
1.5%
1.34%
0.8%
Assets turnover
2.76
2.88
2.86
0.70 financial leverage
3.20
3.12
3.23
3.49
Shareholder’s equity
31%
32%
31%
29%
From coverage ratio analysis we can see Jones electrical distribution’s business is stable business as a retailer. Sales increase 18% and 17% in 2006 and 2007 respectively, with estimation in 2007 will be 20.4%. Shareholder’s equity is around 30%.
Jones sustainable growth rate: g*=RT*ROA, so compare with actual sales growth, we can make the conclusion Jones well managed its growth through year of 2004 to 2007.
As Jones doing low margin business, so should avoid high financial leverage ratio as interest burden will be heavy.
Q2, why does a business that has profit of $30,000 per year need a bank loan? 2004
2005
2006
First Quarter
2007 collection period
42.0 days
44.0 days
43.0 days
43.9 days payables period
10.1 days
10.0 days
24.1 days
37.4 days
From above table we can find out Jones collection period increased step by step and this will need more cash support that, payables period exceed 10 days from 2006, this will lost 2% discount from suppliers.
As Jones sales growth rate is high than sustainable rate, so its net earning could not support increased account receivable and inventory. Then the company need bank loan to finance the increase business.
Q3, what drove the increase in Jones’s accounts receivable and inventory balances in 2005 and 2006?
Sales growth drove the increase of accounts receivable and inventory balances in 2005 and 2006.
Q4, Is Nelson Jones’s estimate that a $350,000 line of credit is sufficient for 2007 accurate?
As