A Dupont Analysis of Jones Inc, Capstone Project Example

Jones Inc portfolio project

The following report represents a Dupont analysis of Jones Inc. including all relative cross-sectional analysis related to the company’s balance sheet, financial ratio analysis and its competitors.  The report concludes with an assessment of the big picture for the company in respect to how all of these numbers relate to one another and what they means the company’s current, previous and future performance.

Ratio Analysis

Working Capital

The working capital of the company represents its ability to pay off its debts, specifically as it relates to the company’s ability to pay off its short term obligations. It’s calculated by dividing the current assets by the current liabilities. Jones Inc. has demonstrated a stable and consistent working capital over the past 6 years with recent uptrends in return on assets being balanced out by a decline in current assets to make the working capital in 2013 substantially lower than in previous years.

Quick Ratio

The quick ratio indicates Jones Inc.’s short-term liquidity. It assesses the company’s capacity to meet its short-term financial obligations with the most liquid assets, which is why inventory is not included in the calculation. The equation utilized to assess the current ratio shown below:

Quick ratio = (current assets – inventories) / current liabilities,

For Jones Inc., the quick ratio for 2013 is noticeably lower than prior years; at 0.73 the quick ratio reveals Jones Inc. only has available $0.73 for every $1 of financial liability. This is different from prior years like 2012 where the quick ratio was 1.27, or 2011 where the quick ratio was 1.26. AS the quick ratio of the company has remained above $1 from 2006 to 2012, the fact that it has recently declined below $1 could imply that the company is less liquid than in previous years. A higher quick ratio would reveal the company to have a higher liquid position.

Cross-sectional analysis

Prior to 2013, when Jones Inc.’s quick ratio declined, the company maintained a quick ratio that was standard with its competitor, as the competitor ratio for 2013 -2006 remained above $1, but below $1.50. This could show signs that Jones inc. is less liquid than its competition.

Current Ratio

The current ratio reveals a  company’s capability to pay off liabilities.  A high current ratio means the company is more likely to use assets to pay off its liabilities  assets (Horngren et al., 2009).  Jones Inc.’s current ratio for 2013  is 1.46, while the company’s current ratio for 2012 was 2.029.   A significantly high current ratio  would indicate the company being too  liquid (Horngren et al., 2009).  Jones Inc.’s current ratio reveal the company is liquid enough to payoff its bills while not being too liquid. The company’s competitor reveals a slightly higher and more consistent current ratio than Jones Inc., as the competitor’s current ratio from 2006 to 2013 never declined below 2.0 and in fact rose to 2.1 on numerous occasions. This shows that the competitor is more capable of meeting their financial obligations than Jones Inc.

Fixed Asset Turnover

Fixed asset turnover refers to a company’s ability to generate revue from its fixed assets, like equipment, machinery, property and other aspects that tend to depreciate in value. Fixed asset turnover is calculated using the formula below.

The fixed asset ratio is monitored more so to follow return on large investments meant to increase production. Jones Inc.’s fixed asset ratio for the year 2013 is 1.04, revealing an increase from 0.88 in 2012. This increase follows a trend the company is demonstrating with its ability to extract value from its assets, and reveals that the source of this new increase in asset turnover and return on assets may be due to an investment made in fixed assets for increased production as the 2012 assets turnover ratio of .88 was slightly lower than numbers shows in 2011, such as 0.90 or in 2010 0.91, or in 2009 with a rate of 0.93. The sudden increase to a record high fixed asset ratio of 1.04 could point to fixed asset investments as the source of new found revenues from production improvements.

Cross-sectional Analysis

In respect to fixed asset turnover Jones Inc. is clearly outperforming its competitor and has been doing so since 2006. The company’s competitor has not attained a a fixed asset turnover rate outside the range of 0.73 (2006) to 0.79 (2013). The competitor does however shoe consistent  increase in the revenue its able to produce from its fixed assets. This may prove to be an areas for concern in the future.

Inventory Turnover

The inventory turnover ratio assesses the number of times a company sells its average inventory each year.  The higher the inventory turnover ratio the better it is for the company because it shows the company easily sells its inventory.

The reason the average inventory is taken as opposed to the ending inventory has to do with the fact that many companies have inventory that can fluctuate through the year, making the average number the better rate. In order to take the average, the inventory from 2013 and 2012 are added and divided by two. The inventory turnover for 2013 was 0.43, while the inventory turnover for 2012 was 0.41. This shows that 2012 has a better year. The significant drop from previous years inventory turnover of 1.50 in 2011 and a 1.53 in 2010 reveals that the company has face recent difficulty unloading its inventory.

Cross-sectional Analysis

The contrast between the inventory ratios of Jones Inc. and its competitor is telling. For the most part Jones Inc. has had a slightly higher inventory turnover than its competitor until recent years. This suggest that Jones Inc. is relatively competitive within its market in regards to selling inventory from year to year.  One explanation for the abrupt increase in Jones. Inc.’s inventory turnover ratio could be due to a recent launch of a new product that the company is having difficulty selling.

 Average Collection Period

The average collection period ratio shows the number of days needed for the company to collect payments receivable. The ratio of 93.8 in 2013 and 93.1 in 2012 reveal it takes Jones Inc. about 1/4^th of the year to collect all receivables. This is adequate for their industry and for the business as it suggests the company sustains liquidity from quarter to quarter through maintaining a health average collection period.   While this is a rate that has fluctuated, for the most part it has remained standard within 90 days and 99 days.

Cross-sectional analysis

Compared to their competitor, which reported an average collection period ratio of 93.1 in 2013 and an average collection period ratio of 94.1 in 2012. It is clear to see that company is competitive within its industry in regards to how efficiently they can collect receivable income.

Basic Earning Power (BEP)

The Basic Earning Power ratio (BEP) assesses how effective a company is at extracting value from its assets. The higher the ratio, the better the company is at generating value. The value is calculated by dividing the EBIT by total assets. While the company’s BEP has remained consistent in the 0.10 range for the past 6 years, it had a recent jump in 2013 to 0.14.

Cross-sectional analysis

In regards to BEP, the company’s competitor has maintained a similar ratio within the 0.10 range, but recently in 2013 the competitor also demonstrated a jump in BEP to 0.11. This however reveals Jones Inc. to still be outperforming its competitor in regards to generating value from assets in 2013.

Debt Ratio

The debt ratio measures a company’s capability to pay off debts.  The lower the debt ratio the more likely it is a company can pay off its debts. Jones Inc. had a debt ratio of 0.6580 in 2013 and a debt ratio of 0.7712 in 2012. As the 2013 rate represents a noticeable decline in the debt ratio from the previous years, such as 0.77 for years 2011, 2010 and 2009, which also represented a slight decline from the 2008, 2007, and 2006 rate of 0.78, it can be concluded that Jones Inc. is making substantially progressive and successful measures at reducing their debt.

Cross-sectional analysis

Once again, Jones Inc., when compared to its competitor maintains a debt ratio that is standard within its market. The competitor’s debt ratio for 2013 is 0.72 showing a slight increase from previous years numbers of 0.67 (2012) and 0.66 (2011). This could suggest that Jones Inc. is slightly outperforming its competition in respect to the ability to pay off its debts.

Price/Earnings Ratio

The price/earnings ratio reveals the market price of a company’s share of common stock based on $1 of earnings.  This ratio is predominantly used to gather factual information about a company’s market value. The P/E, or Price Earnings ratio, shows Jones Inc.’s current share price as it’s relative to the company’s earnings per share.  It’s calculated by dividing Jones Inc.’s market value per share by the company’s earning per share (EPS). The P/E ratio is not useful for telling the entire story about the potential growth of the company but it is useful for comparing the company to other securities within its industry, to identify which investments show the greatest potential growth. As companies that are in the negative tend to have no P/E ratio at all, a positive P/E ratio of any value means the company is profitable. Jones Inc.’s P/E ratio for 2013 is 20.20, while the P/E for 2012 is 27.51. These numbers stay consistent with its prior year P/E ratio ratings which were 25.35 in 2011 and 24.68 in 2010. The P/E has shown a consistent increase since 2006 during which time the company had a P/E of 18.39.

Cross sectional analysis

While Jones Inc. shows a consistency in its P/E ratio staying within a range of 18.39 in 2006 to reaching as high as 25.35 in 2011, the company’s competitor shows a higher P/E on average throughout the past 7 years ranging as low as 22.76 in 2006 to as high as 31.29 in 2012. The competitor’s most recent P/E ratio in 2013 is 28.79, which implies the competitor is inherently more profitable than Jones Inc. These values are controlled by the market and might not reveal anything substantial about the company’s actual performance, value or potential growth.

Earnings Per Share

The earnings per share is the numerical value of a company’s profit allocated to outstanding shares of common stock to show the profitability of a company. Earnings per share is calculated by subtracting dividends on preferred stock from net income and then dividing that by the average outstanding shares. For Jones Inc. the EPS is 2.53 in 2013, which represents a substantial increase from 1.6 in 2012 and 1.58 in 2011. This means the company is increasing the value they deliver to their shareholders.

Book Value Per Share

The book value per share is a metric for common shareholders to assess the value of shares once debts are paid. It’s calculated by dividing the total shareholder equity minus preferred equity, by the total outstanding shares.  The book value per share of the company has actually declined, despite recent jumps in asset turnover. This could be attributed to recent increases in operating costs. Regardless the book value per share has been almost cut in half from 23.23 in 2011 to 12.01 in 2012, only to rise slightly to 14.54 in 2013. This may be a sign of an upward trend but only 2014 numbers can serve as confirmation.

Market/Book ratio

This ratio attempts to find whether a company is undervalued or overvalued by taking its book value and dividing it by its market value. Market book ratios that are above 1 reveal companies to be undervalued, while market book ratios that are less than 1 reveal companies to be overvalued. Jones Inc. had a market/ book ratio of 3.52 in 2013 and 3.73 in 2012 and 3.44 in 2011. The market/book ratio has remained stable above 3.0 since 2006 when it was 2.5. This means the company has been significantly undervalued since 2006.

Cross-sectional analysis

It could be argued this level of undervaluation demonstrated by Jones Inc. stock performance is common for its industry as its competitor has nearly identical market/book ratio numbers, staying stably above 3.0 except for in 2006 when it was still undervalued with a 2.7 ratio.

Times Interest Earned

The times interest ratio measures the number of times a company’s interest expenses can be covered with the operating income of the company.  The higher number, the better it is for the company as it shows the company is financially stable and solvent. Times Interest earned basically measures how easy it is for the company to pay its interest expenses. For example, if the ratio is 1.1, then it means the company can pay their interest exactly 1.1 times. In the case of Jones Inc. the company has consistently been able to pay their interest expenses 1.5-1.7 times over as this ratio metric has ranged from 1.55 in 2006 to 1.79 in 2012. It wasn’t until 2013 when the ratio reached a new rate of 2.79 that the company has revealed it may be outperforming its previous years in regards to its operating profit performance. This also suggest the company may be significantly more liquid than in previous years.

Cross-sectional Analysis

The time interest ratio, represents another ratio that Jones Inc. has improved in where it was under performing compared to its competitor but shows the start of a trend where it may potentially outperform its industry. For example, Jones Inc.’s competitor reported a consistent times interest earned ratio that stayed stagnant between 2.08 (2006) and 2.36 (2013), over the past seven years, revealing that the competitor can pay its interests expenses slightly more than two times over with operating profit. While Jones Inc. has recently demonstrated the same fact with its 2013 rate, there is still the possibility that this is just a minor fluctuation due to the recent 100% jump in ROA and that the rate might return back to previous years, or this could be the sign of a new trend to come. The one way to know for sure is to watch the company closely for the 2014 report.

Dupont Analysis

Net Profit Margin

Net profit margin reveals the amount a company receives in  in income per sale, and gets to keep after all bills are paid  The higher the number, the more money the company is making. It’s calculated by dividing net earnings or net profit by net sales. Jones Inc. net profit margin has stayed consistent in the high to low 0.08 range for the past seven years until recently achieving a record high of 0.1355 in 2013.

Cross-sectional Analysis

Like many of Jones Inc. ratio metrics that reveal the company has made a recent improvement in the 2013 fiscal year, they only do so with the awareness that the company has been underperforming its competition in many key categories. Net profit margin is one of these categories, as the industry average has remained consistent above 0.10, while Jones Inc. has remained consistently below 0.09 until attaining a ratio of 0.091 in 2012. These numbers reveal that Jones Inc. may be on the path towards reversing a trend of under-performing its competitors to outperforming its competitors, but this is a trend that won’t be confirmed until 2014 numbers are revealed.

Total Asset Turnover

The asset turnover is representative of the amount of sales revenue produced per dollar of assets. It reveals the efficiency with which a company is generating revenue per dollar of its assets. The higher this rate the better it really only holds value when used to compare companies within the same industry. The equation below is how the value is calculated.

Asset Turnover = Sales or Revenues/Total Assets

For Jones Inc., the asset turnover remained consistent within a range of 0.32 and 0.36, until it recently reached 0.44 in 2013. This new rate further reaffirms the notion that Jones Inc. has made progressive changes in their strategy to optimize their return on assets, and the value they extract from those assets.

Cross-sectional Analysis

In regard to asset turnover, this is a category where Jones Inc. has slightly outperformed its competitor on a consistent basis. This can be seen with years like 2010, where the company’s competitor reported an asset turnover of 0.33, while Jones Inc. reported a rate of 0.348. The company has maintained a constant lead throughout the years; and while this lead may seem minor, the 2013 rate of 0.44 reported by Jones Inc. points to the company having a substantial edge in its market in regards to the company’s ability to earn value on its assets.

Return on Total Assets

The return on total assets reveals whether or not a company is successfully using their assets to earn profit.  ROA, or return on assets, shows how profitable a company is relative to overall assets. The value is calculated by dividing Jones Inc.’s net income by its total assets. In this regard, both debt and equity are identified as assets.   Since no one ratio can by itself validate whether a company constitutes a sound investment, Jones Inc.’s ROA of 5.96% in 2013 could prove the company is outperforming previous years but it can’t be valued alone. Based on previous years when Jones Inc. had an ROA of 3.10% in 2012, 3.01% in 2011 and 2010, this increase shows the company may be finding better ways to utilize assets to earn greater profits.

Cross-sectional analysis

The fact that Jones Inc. has recently reported a dramatic increase in its ROA of almost 100% from 3.10 in 2012 to 5.96% in 2013 suggests the company might be on the right path to becoming more competitive within its market in regards to gaining value from it assets. The company’s competitor has consistently reported ROAs in the above 4% range over the past 7 years, which suggests that prior to 2013 Jones Inc. may have been slightly under-performing in its market in respect to ROA.

Return on Common Equity

The return on common equity reveals how much income is earned for each dollar that is invested in common equity (Horngren et al., 2009). Jones Inc.’s ROE of 17.44% in 2013 shows an increase from 13.5% in 2012 which was consistent with previous years numbers.

Cross Sectional Analysis

Jones Inc.’s recent increase in ROE reveals a dynamic shift in improving earnings as the company has outperformed the competitor average ROE breaking out of the 12% to 14% range.

Equity Multiplier

The equity multiplier measures the financial leverage of a company, specifically in regards to the amount of assets funded by the shareholders of a company. It essentially reveals the level to which debt is used to acquire assets and keep operations running.

The lower the Equity multiplier ratio the less a company relies on debt financing and the more stable the company is considered to be financially. Jones Inc. had a 1.11 equity multiplier ratio in 2013 which is an improvement from previous year numbers. In 2012 the ratio was 4.37 which was substantially higher and revealed the company to be much more leveraged and reliant on debt financing. In year 2011 this ratio was 4.40 showing the company has had a consistent modest decline in its reliance on shareholders since the 2006 number of 4.7, but the 2013 numbers reveal the company has made dramatic improvements in improving its liquidity and this can largely be attributed to the 100% increase in return on assets reported in the same year.

Cross Section Analysis

Jones Inc. has made substantial improvements on the value it earns from its assets which in turn has resulted in it outperforming its competitor in the equity multiplier category. Until 2013, the company’s competitor was slightly less leveraged with an equity multiplier ratio of 2.86 in 2006, 3.10 in 2010 and now a 3.60 in 2013. If anything the numbers reveal that while Jones Inc. is becoming more liquid and less reliant on debt financing, its competitor is becoming more leveraged and more reliant. This ratio is probably one of the most telling metrics to affirm that recent improvements in Jones Inc. performance might be more than a trend, but the volatile nature of this shift is so dynamic it still needs to be seen if the numbers can carryover to the 2014 fiscal year.

Conclusion & Recommendations

The working capital of the company represents its ability to pay off its debts, specifically as it relates to the company’s ability to pay off its short term obligations. This value assessed by the Quick ratio numbers reveal the company has had a reduction in liquidity in 2013, despite having an increase in its ROA. The substantial increase in the ROA from the 3% numbers in 2012 to it’s current ROA rate of 5.96% implies that Jones Inc. has substantially improved in regards to being able to get a return on its assets. It is important that Jones Inc. does not have money  money just sitting around, not earning a return. The increased ROA to 5.96% suggest the company has put forward new efforts to ensure that this is not the case.   This can be done by through utilizing assets to provide employees with training, or through investing in innovation. The funds can also be utilized by providing employees with bonuses for meeting certain quotas.

If Jones Inc. continues on its current path towards in increasing its working capital in the form of increased ROA, than the quick ratio should rebound back to its original rate as well. This would make the company substantially more liquid and may result in such factors as increased net profits which will increase assets; increased sales which in turn could result in more profits. It’s also recommended that Jones Inc. seek to reduce their costs, as costs are a liability that can be reduced through removing unnecessary expenses. This should be done however without compromising the quality of products. The company is clearly competitive within its market but seems to be under-performing in regards to some factors as well. Future data will reveal whether company has made a solid shift in its market share and positioning or if the recent increases in factors like ROA and decrease in debt financing will crossover into following years.