Financial Ratio Analysis

Financial Ratio Analysis

Student`s Name

Institution of Affiliation

To: JC Penney Company Inc. (JCP)

From: Financial Manager

Date: May 23, 2020

Subject: Financial Ratio Analysis

The liquidity of any company is very important as the creditors can determine the safety of their long and determination of the organization to survive in long run period of operation during the existence in the market. As a shareholder it’s therefore, very crucial to determine the solvency of the company with assured making of profits which are the main purpose of the organization in the modern world. It should be noted that the interest of public is to know that the company or any given firm is able to make interest on any form of payments which are made to the organization either in short or long-term operation of the business. The stockholders and management of the firm should be concerned with the ability of the firm to make profitable decisions that will attract the public to make investment in our company. This can be achieved by accessing our dividends and the overall potential growth of the stock that defines the operations of the business.

Thus, the financial managements of the organization should be able to compare the financial statements which have meaningful interpretation to the organization to make long term decisions and projections. This comparison can be done to all companies that are involved industry to provide meaningful and report which is more reliable to the management and the entire stakeholders. The role of intercompany comparison is to detect and determine the changes of financial information that define the significant trend of the industry. Comparisons with the industry averages provide the information as to a company’s relative performance within the industry.

Well stipulated financial information is helpful in reconstructing the policies of the organization which are indications of good liquidity mechanisms that are being expressed by modern organization. Therefore, according to the analysis provided JCP shows strong inventory levels in their stores more than the many of their competitors as well as the industry making them well positioned to take the advantage of the holiday season traffic. The current ratio change has been used to attract more investor to the company compared to previous period of operation of the firm as the company is able to account for the total assets and liabilities that have indicated managerial changes. However, the decline should be regarded as a major concern to the prospective clients in the market since it gives a reflection of decline in the amount of cash with more concern on the availability of current assets such as inventories.

Moreover, the sole change of turnover rate cannot indicate or translate to the solvency levels of the firm or going concern prospects. Nevertheless, the positive change in sales would be favorable for going-concern prospects, while a decrease in assets could represent several possible scenarios and would need to be investigated further. Overall increase of the net income generated by the organization provides positive impact to the levels of solvency of the firm with more regard to the going concern to prospective clients, although a lot depends on the quality of the receivables that are generated from the sales and how fast they can be converted into the cash.

As management of JCP indication of decline in sales should be motivating factor to reduce the overall cost incurred by the organization to indicate an increase in total earnings of the company in either long or short-term operation of the business. The percentage increase in the firms’ earnings per share, that is very identical to the percentage increase in the net income, is an indication that there has probably been no change in the number of shares of common stock outstanding.

About provided information it’s clear that the profitability of the organization within the timeline have improved with high profit margins and overall earning gained per share which have equally increased within the stated period. With improved financial information it that suggests that the potential investors should be looking at more favorably at the corporation. But the leadership of the company should be concerned that according to provided information the inventory of 2012 was highly moving slower in comparison to same statistics provided for 2011. These can be related to poor pricing techniques or the company is stuck with the obsolete inventory.

The income for the year 2011, JCP have recorded a good increase due to overall combination of increased level of sales and reduction in the cost that the company incurred in providing services to the public. The analysis of financial performance incorporated the profitability of the organization and the risks the company incurred to source funds to manage the activities of the firm during the entire period of operation. The profitability analysis is the evaluation of the JCP return on the investment. It focuses on the company’s sources and the levels of profits and involves identifying and measuring the impact of various drivers of profitability. With improved levels of risk management provides analysis and evaluation of the firm to assess the solvency and liquidity of the company regarding earning variability and company’s future financial implications during the entire operations.

The illustration below provides the analysis of the ratio of the company within the period of 2011, 2012 and 2013.

Current ratio

  2011 2012 2013
Current assets 5,081 3,683 4,833
Current liabilities 2,756 2,583 2,846
  1.8436139 1.425861 1.698173

Cash ratio = cash + marketable securities / current liabilities

201120122013

Cash 175121113

Marketable securities1,3328091,402

Current liabilities 2,7562,5832,846

0.5470.3600.532

Inventory turnover = cost of goods sold/ average inventory

201120122013

COGs11,0428,9198,367

Average inventory 2,9162,3412,935

3.7873.8092.851

  2011 2012 2013  
365 365 365 365  
inventory turnover ratio 96.390147 95.80278 128.0357  
         
  2011 2012 2013    
net sales 5251 4535 4096    
Fixed asset 6343 6098 6968    
  0.8278417 0.743686 0.58783    
           
  2011 2012 2013    
Long-term debt 2,871 2956 4839    
long-term debt 2,871 2956 4839    
common 108 110 152    
  0.9637 0.9641 0.9695    
           
  2011 2012 2013    
Interest expense 227 226      
total long-term debt 2,871 2956 4839    
  0 0    
           
  2011 2012 2013    
Gross profit 6218 4066 3492    
Net Sales 5251 4535 4096    
  1.1841554 0.896582 0.852539    
           
           
  2011 2012 2013    
Operating income (EBIT) -2 -1310 -1420    
Net Sales 5251 4535 4096    
  -0.000381 -0.28886 -0.34668    
           
           
  2011 2012 2013    
Net income -152 -1310 -1420    
Net sales 5251 4535 4096    
  -0.028947 -0.28886 -0.34668    
           
  2011 2012 2013    
Net Income -152 -1310 -1420    
Total assets 11424 9781 11801    
  -0.013305 -0.13393 -0.12033    
           
           
  2011 2012 2013    
Net income -152 -1310 -1420    
shareholders’ equity 4010 3171 3087    
  -0.037905 -0.41312 -0.45999    

References

Booth, W. C., Colombo, G. G., & Williams, J. M. (2009). Craft of research (3rd ed.). Chicago, IL: University of Chicago Press.