Financial Statement Analysis Project: JC Penny Company

2021-05-12 18:28:48
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JC Penny Company is a US based company that operates departmental stores mainly in US states. The company has a total of 1060 departmental stores that are found in 49 US states as well as Puerto Rico. The company securities are traded on the New York stock exchange and as a public company; it is expected to submit its financial statements to the members of the public that are interested in the company (JC Penny, n.d). Any business operates because of the need to create value, and investors are attracted to companies that are able to create value on the invested funds. The financial statements tell a lot about the performance of a company. However, there is a need to conduct further analysis to tell whether it is viable to invest in the company.

Financial ratios are very important in understanding the performance of a company. They give a more detailed report about performance such that individuals can understand the trend the company is facing and makes it possible to compare the performance of the company with the rest of the industry. Such comparisons help tell whether there are other companies doing better. Horizontal and vertical analysis also compliment the financial ratios because both methods give certain information that is very important for different stakeholders. This report analyzes the financial performance of JC Penny Company, comparing the performance with the rest of the industry.

Financial analysis

There are limitations of financial ratios considering that different companies may be dealing with different lines of products which make it difficult to compare performance and at the same time, some companies may be using different accounting principles. In other instances, two ratios under the same category may give contradicting information about performance which may make it difficult to make a conclusion about the performance of the company. Regardless of this, ratios remain very important in understanding the performance of a company. Various ratios are discussed in this report to understand fully the performance of the company. The ratios are based on the 2015 and 2016 financial reports which are the most recent financial report that have been filed by the company to the members of the public.

Current ratio

It measures the ability of a company to pay the dues that fall due in the shortrun, hence ensuring that the company will not face financial difficulties in the short-term which may affect its ability to generate revenues. A value that is greater than 1 is recommended because it indicates an ability to pay short-term liabilities with ease. For JC Penny, the current ratio was 0.74 in the year 2016, which was an improvement from 0.72 in the year 2015. Regardless of the improvement, the company is not doing well because it means that the current liabilities are greater than the current assets, hence the company may face difficulties when repaying the short-term debts. The company should have a good mechanism to get the cash that is required to repay the short-term liabilities, through borrowing or using the revenues generated from sales to repay the liabilities. Compared to the industry, the company is not doing well since the industrial average is 1.26, an indication that the rest of the industry is doing better. The management should work hard to reduce the risk that is associated with the poor current ratio.

Quick ratio for the company is a better measure of short-term liquidity as compared to current ratio since it only includes cash and equivalents that would be used in repaying of debts. The ratio deteriorated from 0.28 in the year 2015 to 0.23 in the year 2016. This shows that the company is at a higher risk of facing challenges when repaying the short-term liabilities. The ratio is below the recommended value. On the other hand, the company is doing better than the industry in this area because the industrial ratio is 0.19. Both the company and the industry, in this case, are not doing well, and there is a need to improve performance in the management of its liquidity.

Profitability ratios tell whether a company is generating value for the shareholders who have invested funds to the company. Gross profit margin helps tell whether the company has the potential to create value. The gross profit margin for the company was 34.76% in the year 2015 and in the year 2016, the value increased to 36.05%. This was an improvement, and it shows that the company has great potential of creating value for the shareholders. In the year 2016, the industrial average was 35.9%, which is below the JC Penny performance. The company is in a better position to perform better than the rest of the industry. However, this depends on whether the management is able to handle the other expenses that are incurred by the company to achieve a positive net profit that is good enough to increase the value of the company.

The net profit margin for JC Penny was negative for the last two years. The value was -5.85% in the year 2015 and in the year 2016, the value improved to -4.06%. The improvement is not enough because the net profit margin remains negative which tells that the company value is lost. There is a need to come up with plans that will ensure that the company makes positive profits. The fact that the company has a large positive gross profit margin and a negative net profit margin tell that the management is not handling the expenses in the company well. There should be a way of dealing with the expenses of the company to ensure that they are minimized. Looking at the industrial values, it can be seen that the JC Penny was performing less than the average industry. The industrial ratio was 3.32%, which is a positive value and means that the industry is creating value for the investors. The JC Penny management has to work plans to reduce expenses at the company and ensure that positive net profits are achieved.

Efficiency is a major factor that has to be evaluated. There are various ratios that test the efficiency of the management in the creation of value to the investors. The first is the inventory turnover ratio which shows the efficiency of the company in converting stock to revenues. The higher the ratio, the greater is the efficiency of the company. For JC Penny, the inventory ratio was 2.86 in the year 2015 and in the year 2016, the value increased to 3times. This is an improvement in the efficiency of the company in converting stock to revenue, and an improvement is recommendable showing that the management is working to improve efficiency. Looking at the industry performance, it can be stated that JC Penny is doing better than the industry members whose ratio is 2.72. However, JC Penny can improve the performance further to achieve greater results.

Accounts receivable turnover is another efficiency ratio that shows how well a company is managing its credit sales and collecting the dues from the debtors. A higher ratio shows that the company is more efficient in the collection of debts and that it takes a shorter period before dues from debtors are collected. This ensures that cash from credit sales is invested further in the business. The accounts receivable turnover in the year 2015 was 67times while in the year 2016, the value decreased to 62 times. Such a reduction is good only if the increased number of days before credit revenue is collected results to an increase in the purchases by the customers through credit. It is also expected that the customers who borrow repay their loans as required. This shows that it is very important that there is a balance between the management of credit and management of receivables.

Various companies have different amounts of assets that are important in the generation of income. The utilization of assets is also measured through the use of ratios. First is the return on assets ratio, which shows how well a company is generating income using its assets. The return on assets for JC Penny increased from -6.96% to -5.43% in the year 2016. Regardless of this improvement, it should be noted that the company is not creating a positive value through utilizing assets because of the fact that the ratio is negative. There is a need for the management to utilize assets to ensure that positive value is created. Looking at the industrial average, it can be seen that the rest of the industry is doing very well in utilizing assets because it has a positive value, which is 4.33%. Though the value is low, the fact is that it is positive, and there is no value lost by the rest of the industrial members.

Asset turnover also measures how well assets are being utilized to generate sales. Since JC Penny has huge assets regarding buildings where the stores are located, it should be able to generate more sales using such assets. In the year 2015, the value of the asset turnover was 1.89, which then reduced to 1.34. This reduction is not a good trend and has to be changed to ensure that there is an improvement in the ratio. While the ratio is good since it is greater than one meaning that the value of sales in the two years is greater than the value of its total assets, there is room for improvement. A greater ratio would indicate greater performance of the company.

JC Penny like any other company requires debts as part of its capital to implement profitable projects that it has. The most important thing is that there should be a balance between the capital structure that the company has to ensure that there the cost of capital does not become a burden and threaten the future of the company. Chances that a company will become bankrupt may discourage future borrowing as well as purchase of the company shares. There are ratios that evaluate this and the first one is the debt to assets ratio. The company debt to assets ratio increased from 0.81 in the year 2015 and in the year 2016, the value was 0.86. This increase means that the company borrowed more debts to finance the purchase of its assets, hence deteriorating the credit worthiness of the company. The company ratios show that the value of asses exceeds the value of company debts. The value is less than one and this means that the company is credit worthy since it has secured its loans against assets. However, the company has to ensure that it does not increase its debts further because it would mean that its assets are all financed by debts, which may be difficult to repay.

Interest coverage ratio tells whether a company can comfortably pay its interest. The income before interest is paid is what is used to measure how well a company has secured its interest. For the JC Penny company, the interest coverage ratio increased from -0.71 in the year 2015 to -0.24 in the year 2016. The fact that the values are negative shows that the company is not able to pay its interest and its premium in any way. This is a dangerous situation which means that the company may end up being bankrupt. The company has a great challenge managing the long-term solvency.

From the analysis of the financial ratios, it can be seen that the company is doing well in terms of efficiency management. In this area, it is doing better than the industry. However, the company is not doing well in the rest of the areas that are also very important. Starting from the solvency ratios, the company is not managing its current assets and liabilities well and are likely to face challenges in the management of its daily activities. In terms of profitability, the company is doing well in generation of revenues and has a good gross profit margin. However, a negative net profit margin is an indication that the company has challenges in managing its expenses. There is a need for the company to address the challenge of its expenses will to ensure that the company achieves positive net profits. Lo...

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