Jones Electrical Distribution Case

Jones Electrical Distribution Case

Question A

How well is “Jones Electrical Distribution” Performing?

From the 2004-2006 data Jones Electrical Distribution is performing well, in that it is high growth company with low profit margins and very low cash. In 2005 and 2006 he has seen 18% and 17% net sales growth respectively and a return on equity of 13.5% and 12.3%, supporting a sustainable growth rate of 14%. In addition to the claims of tight controls on accounts receivable, they are kept at a constant rate of 12% of net sales throughout 2004-2006. Inventory significantly increased from 14% to 17% of net sales in 2006, presumably in anticipation of additional growth in 2007.

The high net sales and sustainable growth rate is highly contrasted with a 2006 profit margin of 1.3%, and an internal growth rate of 4%. To maximize return off the company’s growth, Electrical Jones Distribution will need financing to get cash. In 2005 we can see that this financing was done through a $65k increase in the line of credit payable and an attempt to do the same was done in 2006; however there was only $35k left available in the $250k bank loan to draw from. The immediate solution was to leverage one of the internal financing channels, namely account payable.

From 2005 to 2006 the accounts payable turnover ratio decreased from 45 to 18 or from 7.7 days to 18.8 days. While the increase in accounts payable allowed for $80k to be put into other areas of the business, it forgoes the 2/10 n/30 payment discount to suppliers. This discount is extremely important to the function of the business, with his low profit margins the elasticity of profit to COGS is a whopping -40! While this translates to a very high price to pay for additional cash, it is only relevant as the accounts payable turnover ratio moves from just 10 days to over 10 days. Now that it is above 10 days, there is no additional direct cost for increasing it further to internally finance growth.

What must...