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School Of Business Administration Turiba

Business Administration UVA2D1

Department of Commerce

Financial Analysis of “JK Wrapping”

Vita Zarina

Riga, 2013



Introduction

This work devoted to financial analysis “JK Wrapping”. The chosen topic is timely for several reasons. First of all, financial analysis has never been conducted for this company before and its results are valuable for the company. Second, financial analysis provides useful information that helps in making management decisions such as attracting more capital into the company, changing approach to debt management etc. Third, being able to analyze financial condition of the company is an essential skill for a manager.

The aim of the work is to analyze “JK Wrapping” financial condition and to draw recommendations for its improvement.

The objectives of the research include:

1. Research on financial analysis theory and present short summary about its role and methods.

2. Describe “JK Wrapping”, its operation and other aspects.

3. Conduct financial analysis using different methods.

4. Draw conclusions about financial state of the company and recommend ways of improving it.

The object of the research is “JK Wrapping” company and the subject of the research - financial state of “JK Wrapping”.

The following methods will be used:

- analytical literature review;

- comparison;

- horizontal and vertical analysis of financial statements;

- financial ratio calculations;

- Altman bankruptcy risk assessment model;

- tables and graphs.

The limitation of the research: financial statements of 2008-2010. Different resources have been used for writing this paper, including literature in financial analysis and economic analysis, internet sources, unpublished data of “JK Wrapping”. The paper consists of two parts. The first part is literature review and the second part is empirical research.



1. Literature review: role and methods of financial analysis

1.1 Necessity of financial analysis for commercial firm

Financial analysis is the computation of analytical ratios from financial statements and interpretation of these ratios to determine their trends as a basis for management decisions (CGAP, p. 4). According to Mary Buffett (2006) the financial analysis can be used as a tool to study short- and long-term economic decisions, and the expediency of investments; as assessing mean for skills and quality control; as a way to predict future results. So, the financial analysis provides essential information for company management that allows to:

- make decisions about necessity of additional financing;

- forecast future results and create plans and budgets;

- understand the effectiveness of previously make decisions;

- analyze the ability to invest into development;

- etc.

Financial analysis is usually done in the end of the year, when the financial statements are prepared, but big companies often have their financial state analyses several times a year. In order to understand the tendencies it is important to compare the results of ratios and results of the analysis with the results of previous year, average results from the market or with rivals' results. It is hereby advised to use financial statements for at least 3 years for comprehensive results.

The following documents are primary sources of information for financial analysis:

- balance sheets;

- income statements;

- shareholders equity statements;

- cash flow statements (Lermack, 2003).

Financial analysis results are or can be important not only for the company (its shareholders, managers), but also for the parties outside the company such as investors, banks, statistical bureaus etc. In table 1, the information about organizational stakeholders and users of financial information are demonstrated.

Table 1. - Organizational stakeholder and users of financial information (Spencer & Stradling, 2001, p. 7):

Stakeholders	Use financial information for
Owners/shareholders	Assessing their investment
Management	Running the business
Employees	Assessing security of employment
Government	Taxation, economic statistics
Lenders	Assessing ability of borrower to pay
Suppliers	Volume and value of future orders
Customers	Reliability of future supply
General public	Impact on local economy

It is always possible to delegate financial analysis to third parties, these services are usually rather expensive and the biggest disadvantage is that the analyst is only using the information he/she can find in provided documents, he/she has no experience with this specific organization and does not know its peculiarities. Conducting financial analysis by company's own resources can be time-consuming, another problem is lack of knowledge in financial analysis. In author's opinion these problems can be solved, there are numerous options for obtaining knowledge in this field, so employees can be educated.

According to Vance D.E. (2003), in order for financial analysis to be qualitative, financial statements and other documents that are used as sources of information have to conform with the following principles:

- entity principle - it is important to draw a boundary around the entity being reported on so that it is clearly defined;

- objectivity - the data should be objective, verifiable and not subject to judgment;

- matching principle - depreciation is an example of this principle;

- specific time periods - transaction should be promptly classified;

- comparability - data should be comparable from year to year;

- conservatism - because financial statements and other financial information is often used by, and replied upon, by third parties, it is important to avoid misleading them and present the information in the most conservative light;

- materiality - information should be substantially correct, not perfect.

An extensive methodology has been created over time for financial analysis. This question is referred in the next subchapter 1.2.

1.2 Methods of financial analysis

Different methods can be used to analyze company's financial state. Figure 1, demonstrates some of the methods.

Figure 1. - Methods of financial analysis (UNILIB, 2008):

In this paper the author will use horizontal and vertical analysis as well as financial ratio calculations and comparison.

Horizontal analysis. Horizontal analysis allows to see the dynamics in time (as one year compared to another or to basic year). These comparisons are performed in one of two different ways - absolute form and percentage form (Warren, et.al, 2011, p. 73).

When performing analysis in absolute last, the lat amount of certain item over a period of time is compared to another, for example:



Change in lats = Sum of inventory in 2010 - Sum of inventory 2009

When using percentage, the calculated change is turned into percent, for instance:

Change in percent = Change in lats *100% - 100%

Vertical analysis. The vertical analysis compares each separate figure to one specific figure in the financial statement. The comparison is reported as a percentage. This method compares several items to one certain item in the same accounting period. This analysis allows the analyst to see into structure of company's statement. An example of calculation is as follows:

Share of marketing expenses = Marketing expenses in 2010 / Net turnover in 2010 * 100%

Financial ratios. Financial ratios are relative magnitude of two selected numerical values taken from an enterprise's financial statements (Smith, 2008).The basic source of these ratios is the company's profit & loss account and balance sheet that contain all kinds of important information about that company.

There are different types of ratios - liquidity (show whether the company can complete its short term liabilities), financial sustainability (shows whether the company is too much dependent on external sources of financing), activity ratios (show how effective the company deals with its assets and liabilities), profitability ratios (shows the return on investment).

The author will address them with indicating formulas in practical part of the paper.



2. Financial analysis of “JK Wrapping”

2.1“JK Wrapping” description

“JK Wrapping” limited liability company is operating in Latvian market and offers a wide range of services:

- lamination of cars;

- color change or partial color change of the car with the use of wrapping technology;

- interior design for cars;

- vinyl aerographs;

- advertising on transport;

- shading for car glass and optics.

Main orientation of the company is wrapping technology, it is rather new for Latvian market and the demand for it is growing as it is the best alternative for traditional painting and has a lot of advantages over it.

“JK Wrapping” is cooperating with one of the biggest and well known manufacturers of wrapping materials - German company “KPMF”.

The company has 15 employees, the structure of the company is demonstrated in figure 2.

Figure 2. - Organizational structure of “JK Wrapping”:



The company is currently estimating possible ways of developing as it aims for growth and increasing its market share. It has already cooperated with big clients such as taxi company that is owned by “Air Baltic” and other larger companies, but most clients represent smaller firms or a private clients.

2.2 Horizontal and vertical analysis of financial statement

The financial statements for the analysis are shown in Appendixes 1 and 2. First horizontal and then vertical analysis will be conducted. Results of horizontal analysis are demonstrated in Table 2.

Table 2. - Horizontal analysis of balance sheet for “JK Wrapping” in 2008-2010, in lats:

Assets	31.12.2008	31.12.2009	%	Net change %	31.12.2010	%	Net change %
Non-current assets
Property, plant and equipment	60 932	62 365	102,352	2,35	67 356	108,003	8,00
Non-current assets (sum)	60 932	62 365	102,352	2,35	67 356	108,003	8,00
Inventory
Materials	225	314	139,556	39,56	190	60,510	-39,49
Goods for sale and ready commodity	3 699	679	18,356	-81,64	2 110	310,751	210,75
Advance payment for goods	30	0	0,000	-100,00	42
Inventory (sum)	3 954	993	25,114	-74,89	2 342	235,851	135,85
Receivables
Debts of buyers	749	750	100,134	0,13	1 447	192,933	92,93
Other receivables	131	0	0,000	-100,00	92		100.00
Receivables (sum)	880	750	85,227	-14,77	1 539	205,200	105,20
Cash and cash equivalents	102	93	91,176	-8,82	417	448,387	348,39
Current assets (sum)	4 936	1 836	37,196	-62,80	4 298	234,096	134,10
Balance	65 868	64 201	97,469	-2,53	71 654	111,609	11,61
Liabilities and Equity	31.12.2010	31.12.2009	%	Net change %	31.12.2008	%	Net change %
Equity
Share capital	2 000	2 000	100,000	0,00	2 000	100,000	0,00
Undistributed profits of past years	-26 655	-11 894	44,622	-55,38	-4 360	36,657	-63,34
Undistributed profits of current year	-508	-14 760	2905,512	2805,51	-7 534	51,043	-48,96
Equity (sum)	-25 163	-24 654	97,977	-2,02	-9 894	40,131	-59,87
Other reserves	642	642	100,000	0,00	1 279	199,221	99,22
Reserves (sum)	642	642	100,000	0,00	1 279	199,221	99,22
Liabilities
Other long term liabilities	84 739	83 572	98,623	-1,38	76 760	91,849	-8,15
Long term liabilities (sum)	84 739	83 572	98,623	-1,38	76 760	91,849	-8,15
Short term liabilities
Other liabilities	3 700	1 449	39,162	-60,84	0	0,000	-100,00
Payables	994	2 310	232,394	132,39	1 185	51,299	-48,70
Taxes and social payments	329	648	196,960	96,96	769	118,673	18,67
Other creditors	462	137	29,654	-70,35	1 054	769,343	669,34
Deferred liabilities	165	97	58,788	-41,21	501	516,495	416,49
Short term liabilities (sum)	5 650	4 641	82,142	-17,86	3 509	75,609	-24,39
Liabilities (sum)	90 389	88 213	97,593	-2,41	80 269	90,995	-9,01
Balance	65 868	64 201	97,469	-2,53	71 654	111,609	11,61

As it can be seen in table 2.1., in 2009 the balance decreased by 2,5%, but in 2010 it increased by 11,6%.

The reason for that can be found in external environment, during economic crisis the demand for such services lowered. Property, plant and equipment increased in 2009 and 2010. Receivables and inventory decreased in 2009, but grew in 2010 by more than 100%. Positive tendency of asset increase was identified. The dynamics of balance are demonstrated in Figure 3.

Figure 3. - Dynamics of “JK Wrapping” balance sum in 2008-2010, in lats:

As for the equity - share capital did not change, it is on the basic level for LLC companies. Due to undistributed loss of previous years, the equity is negative, but slowly decreasing which is a positive sign. “JK Wrapping” long-term liabilities decreased and same did short term liabilities, which may indicate that the financial sustainability is improving. Vertical analysis is demonstrated in table 3.

Table 3. - Vertical analysis of balance sheet for “JK Wrapping” in 2008-2010, in lats:

Assets	31.12.2008	%	31.12.2009	%	31.12.2010	%
1	2	3	4	5	6	7
Non-current assets
Property, plant and equipment	60 932	92,51	62 365	97,14	67 356	94,00
Non-current assets (sum)	60 932	92,51	62 365	97,14	67 356	94,00
Inventory
Materials	225	0,34	314	0,49	190	0,27
Goods for sale and ready commodity	3 699	5,62	679	1,06	2 110	2,94
Advance payment for goods	30	0,05	0	0,00	42	0,06
Inventory (sum)	3 954	6,00	993	1,55	2 342	3,27
Receivables
Debts of buyers	749	1,14	750	1,17	1 447	2,02
Other receivables	131	0,20	0	0,00	92	0,13
Receivables (sum)	880	1,34	750	1,17	1 539	2,15
1	2	3	4	5	6	7
Cash and cash equivalents	102	0,15	93	0,14	417	0,58
Current assets (sum)	4 936	7,49	1 836	2,86	4 298	6,00
Balance	65 868	100,00	64 201	100,00	71 654	100,00
Liabilities and Equity
Equity
Share capital	2 000	3,04	2 000	3,12	2 000	2,79
Undistributed profits of past years	-26 655	-40,47	-11 894	-18,53	-4 360	-6,08
Undistributed profits of current year	-508	-0,77	-14 760	-22,99	-7 534	-10,51
Equity (sum)	-25 163	-38,20	-24 654	-38,40	-9 894	-13,81
Other reserves	642	0,97	642	1,00	1 279	1,78
Reserves (sum)	642	0,97	642	1,00	1 279	1,78
Liabilities
Other long term liabilities	84 739	128,65	83 572	130,17	76 760	107,13
Long term liabilities (sum)	84 739	128,65	83 572	130,17	76 760	107,13
Short term liabilities
Other liabilities	3 700	5,62	1 449	2,26	0	0,00
Payables	994	1,51	2 310	3,60	1 185	1,65
Taxes and social payments	329	0,50	648	1,01	769	1,07
Other creditors	462	0,70	137	0,21	1 054	1,47
Deferred liabilities	165	0,25	97	0,15	501	0,70
Short term liabilities (sum)	5 650	8,58	4 641	7,23	3 509	4,90
Liabilities (sum)	90 389	137,23	88 213	137,40	80 269	112,02
Balance	65 868	100,00	64 201	100,00	71 654	100,00

Property, plant and equipment made 92-97% of assets and only 3-7% current assets.

For the type of services the company provides specific equipment as well as garage etc. are required.

The structure of assets in 2010 is shown in figure 4.

Equity is negative so it has negative share, reserves make 1-2%, short-term liabilities 6-8%.

But long-term liabilities make the biggest share over 100% because they are more than the balance sum (see Figure 5.).



Figure 4. - Structure of “JK Wrapping” assets in 2010, in %:

Figure 5. - Structure of “JK Wrapping” equity and liabilities in 2010, in %:

Next the profit or loss statement is analyzed using both - vertical and horizontal analysis at a time (Table 4.).

Table 4. - Vertical and horizontal analysis of profit or loss statement for “JK Wrapping” in 2008-2010, in lats:

Post	31.12.08	Share	31.12.09	Change	Share	31.12.10	Change	Share
		%		%	%		%	%
Netturnover	21 798	100,00	35 369	62,26	100,00	79 552	124,92	100,00
Cost of sales	21 545	98,84	41 345	91,90	116,90	65 663	58,82	82,54
Gross profit or loss	253	1,16	-5 976	-2 462,06	-16,90	13 889	-332,41	17,46
Marketing expenses	663	3,04	2 241	238,01	6,34	4 050	80,72	5,09
Administrative expenses	911	4,18	927	1,76	2,62	3 251	250,70	4,09
Other income from operation	5682	26,07	64	-98,87	0,18	33	-48,44	0,04
Other costs of operation	4869	22,34	5 680	16,66	16,06	13 677	140,79	17,19
Profit or loss before taxes	-508	-2,33	-14 760	2 805,51	-41,73	-7 056	-52,20	-8,87
Income tax	0	0,00	0		0,00	0		0,00
Deferred tax	508	2,33		-100,00	0,00	478		0,60
Net profit or loss	-508	-2,33	-14 760	2 805,51	-41,73	-7 534	-48,96	-9,47

Over the whole period of analysis “JK Wrapping” had financial loss, this is because of big expenses, including expenses in development (company is planning to grow). Cost of sales make a large share of turnover, other expenses have smaller share. It is actually very common for service companies to have little or no net profit. The net turnover is increasing steadily and in 2010 it more than doubled.

The dynamics of main profit indicators are shown in Figure 6.

Figure 6. - Profit dynamics of “JK Wrapping” in 2008-2010, lats:



3. Financial ratios

Liquidity ratios. Liquidity ratios provide information about a firm's ability to meet its short-term financial obligations. They are of particular interest to those extending short-term credit to the firm. Two frequently-used liquidity ratios are the current ratio and the quick ratio (NetMBA, 2010). The author will also calculate absolute liquidity or cash liquidity ratio.

Current liquidity ratio = Current Assets / Current liabilities (1)

Quick ratio = (2)

Absolute ratio = (3)

The results of calculations are demonstrated in table 5.

Table 5. - Liquidity ratios for “JK Wrapping”:

Indicator	Norm	31.12.2008	31.12.2009	31.12.2010
CurrentLiquidityRatio	1,5 - 2,00	0,87	0,40	1,22
Quick Liquidity Ratio	0,7 - 1,00	0,17	0,18	0,56
Absolute Liquidity Ratio	0,05 - 0,20	0,02	0,02	0,12

Company's liquidity ratios are mostly below the recommended value.

In 2008 all liquidity ratios were lower than the norm, same situation with 2009, but it gotten worse. In 2010 the ratios improved, but current and quick liquidity were still below the recommended value, while absolute liquidity was in the required interval. It should be noted that the level of firm's solvency can be characterized as rather poor, but there are slight signs of recovery.

Financial sustainability. Financial sustainability is independence in financial terms and compliance of assets and liabilities with the tasks of financial and economic activity.



Figure 7. - Liquidity ratio dynamics for “JK Wrapping” in 2008-2010:

In this paper the author will use method of evaluation for company's sustainability that has been offered by Sheremet and Saifulin (2010). This method is based on calculations of three basic indicators - the amount of current assets, the amount of equity and long-term sources.

1. Availability of current assets (CA):

CA = Own sources (equity and stock) - Non-current assets (4)

2. Availability of own and loaned sources for stocks and costs (OL):

OL = CA + Long term liabilities (5)

3. Total amount of the main sources for stocks and costs (MS):

MS = OL + Short term liabilities (6)

After these amounts are determined, then it is important to compare whether these sources are sufficient to ensure stocks. To do that, it is required to calculate the following indicators:



Surplus + or shortage - in current assets = ДCA

ДСA = CA - stocks (7)

Surplus + or shortage - in own and long-term sources = ДOL

ДOL = OL - stocks (8)

Surplus + or shortage - in the total amount of main sources = ДMS

ДMS = MS - stocks (9)

Then these indicators are combined into a single three components indicator:

The results should be compared to the normative levels of stability:

1. S = {1}, i. e.:

ДCA ? 0;

ДOL ? 0;

ДMS ? 0.

Absolute stability - means that the company is not at all dependent on external sources of financing, which is a very rare situation.

2. S = {0,1}, i. e.:

ДCA < 0;

ДOL ? 0;

ДMS ? 0.

Normal stability - such a company uses all of its financing sources.

3. S = {0,0}, i. e.:

ДCA < 0;

ДOL < 0;

ДMS ? 0.

Unstable financial condition - situation that can threaten solvency, in this case the company needs to take measures to improve the indicator, that can be done by replenishment of sources, working with debtors, stocks turnover etc.

4. S = {0}, i. e.:

ДCA < 0;

ДOL < 0;

ДMS < 0.

The financial crisis - company is close to insolvency and bankrupt, very dangerous situation. Reasonable reduction of stock, replenishment of stocks can improve the situation to some extent.

Calculated indicators of financial sustainability of the company are presented in table 6.

Table 6. - Indicators of financial sustainability of “JK Wrapping” in 2008-2010:

Indicator	Sign	31.12.2008	31.12.2009	31.12.2010
1	2	3	4	5
Amount of currentassets	CA	-85 453	-86 377	-75 971
Amount of own and long-term loan sources	OL	-714	-2 805	789
Amount of main sources for current assets	MS	4 936	1 836	4 298
Surplus (+) or shortage (-) in current assets	ДCA	-89 407	-87 370	-78 313
Surplus (+) or shortage (-) in OL	ДOL	-4 668	-3 798	-1 553
Surplus (+) or shortage (-) in MS	ДMS	982	843	1 956
Indicator of three components S	S	{0; 0; 1}	{0; 0; 1}	{0; 0; 1}

According to the calculated S component, during the whole period of analysis the company had unstable financial condition, which means that there is threat to solvency and there is a lack of own sources. Increasing own stocks would improve the situation.

Profitability ratios. Profitability ratios as it can be seen from their name, show how profitable is the operation of a company.

These ratios are important for investors and banks as they show how beneficial it can be to invest into such a company, whether the return would be acceptable. Profitability ratios show a company's overall efficiency and performance (Peavler, 2012).

The following profitability ratios will be calculated:

1. Gross profit margin:

Gross profit margin = Gross profit / Net turnover * 100% (10)

2. Net profit margin:

Net profit margin = Net profit / Net turnover * 100% (11)

3. Return on assets:

Net profit / Total Assets * 100% (12)

4. Return on equity:

Net profit / Equity * 100% (13)

The results of calculations are demonstrated in table 7.

Table 7. - Profitability ratios for “JK Wrapping” in 2008-2010:

Ratios	2008	2009	2010
Gross profit margin	1,16%	-16,90%	17,46%
Net profit margin	-2,33%	-41,73%	-9,47%
Return on assets	-0,77%	-22,99%	-10,51%
Return on equity	2,02%	59,87%	76,15%

Gross profit margin in 2010 was actually rather good and measured around 17,5%, net profit was negative at all times, so each invested lat does not give profit, it gives loss. Return on assets was also negative.

Return on equity turned positive as company's equity is more negative than net profit for the same period.

In general profitability level is low. Profitability ratios are demonstrated in Figure 8.

Figure 8. - Profitability ratios for “JK Wrapping” in 2008-2010, %:

Activity ratios. Activity ratios show how efficient the company is dealing with its inventory, receivables, payables. These ratios can be calculated in days as well.

Based on these ratios it is possible to calculate the length of financial cycle which demonstrates whether the company has a period of time when additional resources are needed to finance operation. The formulas for calculations are presented below (Sinha, 2009, p.133-135):

1. Inventory turnover:

Inventory turnover = Costs of sales / Inventory (12)

In order to get the indicator in days, 365 days should be divided by the above indicator, same with the rest turnover indicators.

2. Receivables turnover:



Receivables turnover = Net turnover / Receivables (13)

3. Payables turnover:

Payables turnover = Net turnover/Payables (14)

4. Length of financial cycle:

FC = Inventory turnover + Receivables Turnover - Payables turnover (15)

The results of calculations for these ratios are shown in table 8.

Table 8. - Activity ratios for “JK Wrapping” in 2008-2010:

Ratio	2008	2009	2010
Inventory turnover	5,45	41,64	28,04
In days	66,99	8,77	13,02
Receivables turnover	24,77	47,16	51,69
In days	14,74	7,74	7,06
Payables turnover	3,86	7,62	22,67
In days	94,61	47,89	16,10
Financial cycle (days)	-12,89	-31,39	3,98

Inventory turnover has a tendency to become shorter, it is a good sign and shows that the company manages its inventory rather effectively.

The situation is similar with debtors, 7 days of receivables turnover is a very good indicator, this was achieved thanks to effective debt management system, mostly customers have to pay upon receipt of service and only some customers may get payment delay.

Payables turnover has a tendency to become shorter as well, it was almost 95 days in 2008 and 16 days in 2010. In 2008 and 2009 financial cycle was negative, but in 2010 it became positive and it means that 4 days the company may lack financial resources to finance inventory.

The dynamics of these ratios are demonstrated in Figure 9.

Figure 9. - Activity ratios dynamics for “JK Wrapping” in 2008-2010, in days:

Bankruptcy risk.Total insolvency (also referred as bankruptcy or pre-bankruptcy state) is the situation when the business can no longer avoid the public confession of failure, and management's attempts to secure additional funds generally prove unsuccessful, total liabilities exceed the value of company's assets (Newton, 2009, p. 45).

There are various methods of determining the risk of bankruptcy, they are qualitative (subjective and rarely used by analysts) and quantitative (with different range of variables).

One of the most widespread models that are used to evaluate the risk of bankruptcy of the company is Altman's model (2002). Author will use 5 variable method.

The results of calculations are summarized in table 9.

If the Z indicator is:

- up to 1,8 then the risk of bankruptcy is very high;

- if it is between 1,8 and 2,7 - it is high;

- for the range 1,7 - 2,99 - risk is moderate;

- 3 and higher - very low risk.

The dynamics of Z-indicator is demonstrated in Figure 10.

Table 9. - Altman model for “JK Wrapping” for bankruptcy risk assessment in 2008-2010:

Figure 10. - Altman's Z-indicator dynamics for “JK Wrapping” in 2008-2010:

As it can be seen in this case the risk of bankruptcy can be assessed as very high, so the company should increase own sources of investment, it is very important in order to continue operation.

Though it is important to mention that in 2010 the Z-indicator was at least positive because previous years it was negative.

To sum up:

- “JK Wrapping” liquidity ratios are lower than the recommended value, only the absolute liquidity ratio is within the accepted interval (and only in 2010);

- “JK Wrapping” has too little own sources of financing which leads to instability and threat to solvency, company's equity and liabilities mostly consist of long-term loans;

- JK “Wrapping” has low profitability ratios (except gross margin in 2010) and assets, equity, net margin have negative profitability (loss), which makes the company not at all attractive for investors;

- “JK Wrapping” activity ratios are on acceptable level and receivables turnover is very good (7 days), but in 2010 the financial cycle was positive;

- According to Altman bankruptcy risk detection model, “JK Wrapping” has high risk of bankruptcy in its current state.

This indicated that the company is in rather instable situation and needs to take measures to improve it. Getting more credits is very unwanted right now, it is important to increase own funding sources as this would solve many problems.



Conclusions and recommendations

To sum up, the author makes the following conclusions:

1. Financial analysis is the computation of analytical ratios from financial statements and interpretation of these ratios to determine their trends as a basis for management decisions.

2. Financial analysis can be used as a tool to study short- and long-term economic decisions, and the expediency of investments; as assessing mean for skills and quality control; as a way to predict future results.

3. “JK Wrapping” limited liability company is operating in Latvian market and offers a wide range of services such as car lamination, color change with wrapping technology, advertising on transport, vinyl aerographs etc. The company has 15 employees and aims for development and growth.

4. “JK Wrapping” balance decreased in 2009, but grew in 2010 by almost 12%.

5. In company's equity and liabilities long-term liabilities dominate (more than 80%), own sources are negative, but have tendency for improvement slowly.

6. Over the whole period of analysis “JK Wrapping” had financial loss, this is because of big expenses, including expenses in development. Cost of sales make a large share of turnover, other expenses have smaller share. It is actually very common for service companies to have little or no net profit. The net turnover is increasing steadily and in 2010 it more than doubled.

7. “JK Wrapping” liquidity ratios are lower than the recommended value, only the absolute liquidity ratio is within the interval;

8. “JK Wrapping” has too little own sources of financing which leads to instability and threat to solvency;

9. JK “Wrapping” has low profitability ratios (except gross margin in 2010) and assets, equity, net margin have negative profitability (loss);

10. “JK Wrapping” activity ratios are on acceptable level and receivables turnover is very good (7 days);

11. According to Altman bankruptcy risk detection model, “JK Wrapping” has high risk of bankruptcy in its current state.

Recommendations for the company:

1. Financial sustainability should be strengthened by reducing dependence on external financing, it is advised to increase the amount of own sources of financing, which can be done by attracting another member of the board with own share capital. Part of next year's net profit should be also directed to increase of share capital (if there would be profit).

2. Considering that the company is planning for development the management needs to spend more time on financial strategy development, in order to make it more effective.

3. The company should try to decrease inventory turnover or to get possibility to delay payment for creditors in order to decrease financial cycle.

4. The company should increase net turnover in order to have better profits, more advertising is required.



Bibliography

1. Lermack, H.B., 2003. Steps to Basic Company Financial Analysis. Philadelphia: Philadelphia University.

2. Spencer, T., Stradling, B., 2001. Financial Analysis. Cambridge: Select Knowledge Limited.

3. Vance, D.E., 2003. Financial Analysis and Decision Making: Tools and Techniques to Solve Financial Problems and Make Effective Business Decisions. New York: McGraw-Hill Professional.

4. Warren, C.S., Reeve, J.M., Duchac, J., 2011. Financial Accounting. Mason: Cengage Learning.

5. Altman, E.I., 2002. Bankruptcy, credit risk, and high yield junk bonds. Oxford: Wiley-Blackwell.

6. Sinha, G., 2009. Financial Statement Analysis. New Delhi: PHI Learning Private Limited.

7. Newton, G.W., 2009. Bankrtuptcy and Insolvency Accounting: Practice and Procedure. New Jersey: John Wiley and Sons.

8. CGAP, 2008. Financial Analysis. Available at: Resource accessed 7th March 2012.

9. UNILIB, 2008. Методы финансового анализа. Available at: Resource accessed 7th March 2012.

10. Smith, A., 2008. Financial ratios. Available at: Resource accessed 7th March 2012.

11. NetMBA, 2010. Financial Ratios. Available at: Resource accessed 7th March 2012. financial commercial capital

12. Peavler, R., 2012. Use Profitability ratios in Financial Ratio Analysis. Available at: Resource accessed 9th March 2012.

13. Financial statements of “JK Wrapping” for 2008-2010.



Appendix 1



Appendix 2

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