Business Analysis and Business Valuation JJP Autoparts, Inc., a manufacturer of auto parts, expe- rienced a decline in earnings in the recent year and has consulted its accounting firm for an analysis of the firm's financial statements. Additionally, the company knows that its market value has fallen from the prior year, since the share price has fallen from $5.50 at the end of 2009 to $2.34 at the end of 2010. So, JJP also want an analysis of the firm's change in value. The comparative balance sheet and income statement for 2010 follows:
|
Balance Sheet
|
2010
|
2009
|
|
Cash
|
$453,680
|
$455,675
|
|
Accounts receivable
|
38,756
|
34,885
|
|
Inventory
|
156,754
|
134,665
|
|
Total current assets
|
649,190
|
625,225
|
|
Long-lived assets
|
452,541
|
445,287
|
|
Total assets
|
$1,101,731
|
$1,070,512
|
|
Current liabilities
|
$ 219,884
|
$ 265,448
|
|
Long-term debt
|
350,000
|
350,000
|
|
Shareholders' equity
|
531,847
|
455,064
|
|
Total debt and equity
|
$1,101,731
|
$1,070,512
|
|
Income Statement Sales
|
$1,588,364
|
$1,455,634
|
|
Cost of sales
|
1,289,665
|
1,109,886
|
|
Gross margin
|
298,699
|
345,748
|
|
Operating expenses
|
174,855
|
133,874
|
|
Operating income
|
123,844
|
211,874
|
|
Tax expense
|
47,061
|
80,512
|
|
Net income
|
$ 76,783
|
$ 131,362
|
Note: The amounts for operating expense above include depreciation expense of $43,997 in 2009 and $42,746 in 2010.
Additional relevant information about JJP is that it uses a cost of capital rate of 5.7 percent. Also it incurred capital expenditures of $100,000 in 2009 and $50,000 in 2010; there were no cash divi- dends in either year. The number of outstanding shares is 653,554, the same in both years.
Industry data, the average values for firms in the autoparts industry, follow:
|
Sales multiplier:
|
2.20
|
|
Free cash flow multiplier
|
8.80
|
|
Earnings multiplier
|
21.00
|
|
Accounts receivable turnover
|
8.80
|
|
Inventory turnover
|
7.00
|
|
Current ratio
|
2.00
|
|
Quick ratio
|
1.10
|
|
Cash flow from operations ratio
|
1.40
|
|
Free cash flow ratio
|
1.10
|
|
Gross margin percentage
|
30.0%
|
|
Return on assets (net book value)
|
18.0%
|
|
Return on equity
|
24.0%
|
|
Earnings per share
|
$ 1.15
|
Required:
1. Calculate and interpret the liquidity, cash flow, and profitability ratios for JJP for 2009 and 2010. In your calculations, you may assume that the balance sheet values for 2009 are the same as for the prior year, 2008.
2. Develop and interpret a business valuation for JJP for 2009 and 2010 using the methods you think appropriate.