Just for Feet, Inc.
Case Study of
Just For Feet Inc.
Xuan Zhang
Q1. Prepare common-sized balance sheets and income statements and compute key ratios for 1997-1998. What were the high-risk financial statement items for the 1998 audit?
* Common-sized financial statements:
* Key ratio analysis:
Liquidity and solvency: | 1999 | 1998 | 1997 |
Current ratio | 3.387 | 1.998 | 2.142 |
Debt to equity | 1.117 | 0.672 | 0.720 |
Times interest earned | 6.376 | 24.665 | 28.286 |
Activity | | | |
AR turnover | 44.641 | 42.749 | 39.127 |
Inventory turnover | 1.493 | 1.649 | 1.107 |
Profitability ratios | | | |
Operating margin | 6.61% | 7.17% | 8.12% |
Net margin | 3.44% | 4.47% | 5.43% |
Return on assets | 3.87% | 4.77% | 3.70% |
Return on equity | 8.18% | 7.98% | 6.37% |
According to the data computed above, Just For Feet did relatively well in liquidity since the current ratio and debt to equity were similar to companies in the same industry. Besides, JFF had a typical AR turnover rate as others in the retail businesses, and the operating margin and net margin also looked fine. But turn to inventory turnover rate, the number was quite terrible for a retail company. Compare to average number of the industry which is around 2.8-3.2, JFF’s faced a serious difficulty on inventory turnover, which led to a potential risk in generating profit. Also the return on assets and equity were below the competitors in the market, and the time interest earned declined very fast during 1996-1998, means that the quality of financing activities was poor.
* High-risk financial statement items:
For 1998 audit, there were several factors should be carefully concerned. The first was the number of inventory. JFF’s inventory in 1998 consisting more than half of the company’s total assets, which was a high risk factor and need more efforts on physical confirmation and valuation. The second audit red flag was the negative cash flow. The common cash flow for
Just For Feet Inc.
Xuan Zhang
Q1. Prepare common-sized balance sheets and income statements and compute key ratios for 1997-1998. What were the high-risk financial statement items for the 1998 audit?
* Common-sized financial statements:
* Key ratio analysis:
Liquidity and solvency: | 1999 | 1998 | 1997 |
Current ratio | 3.387 | 1.998 | 2.142 |
Debt to equity | 1.117 | 0.672 | 0.720 |
Times interest earned | 6.376 | 24.665 | 28.286 |
Activity | | | |
AR turnover | 44.641 | 42.749 | 39.127 |
Inventory turnover | 1.493 | 1.649 | 1.107 |
Profitability ratios | | | |
Operating margin | 6.61% | 7.17% | 8.12% |
Net margin | 3.44% | 4.47% | 5.43% |
Return on assets | 3.87% | 4.77% | 3.70% |
Return on equity | 8.18% | 7.98% | 6.37% |
According to the data computed above, Just For Feet did relatively well in liquidity since the current ratio and debt to equity were similar to companies in the same industry. Besides, JFF had a typical AR turnover rate as others in the retail businesses, and the operating margin and net margin also looked fine. But turn to inventory turnover rate, the number was quite terrible for a retail company. Compare to average number of the industry which is around 2.8-3.2, JFF’s faced a serious difficulty on inventory turnover, which led to a potential risk in generating profit. Also the return on assets and equity were below the competitors in the market, and the time interest earned declined very fast during 1996-1998, means that the quality of financing activities was poor.
* High-risk financial statement items:
For 1998 audit, there were several factors should be carefully concerned. The first was the number of inventory. JFF’s inventory in 1998 consisting more than half of the company’s total assets, which was a high risk factor and need more efforts on physical confirmation and valuation. The second audit red flag was the negative cash flow. The common cash flow for