Just for Feet Inc: Financial Risk Analysis

Common-Size Balance Sheet for period ended January 31, 1996-1998

Just for Feet Inc Common size balance sheet For the period ending January 31st
		1996	1997	1998
Current Assets	Cash equivalents	36.93%	18.40%	1.80%
	Marketable Securities AFS	9.04%	0.00%	0.00%
	Inventory	35.74%	46.97%	58.01%
	Accounts receivables	1.74%	3.53%	2.74%
	Other Current Assets	0.56%	1.50%	2.65%
	Total Current Assets	83.75%	69.40%	65.20%
Goodwill		0.00%	8.05%	1.31%
Other		1.64%	1.46%	1.19%
Property and Equipment		14.61%	21.08%	23.29%
	Total Assets	100%	100%	100%
Current Liabilities	Current maturities for LT debt	0.56%	0.72%	0.96%
	Accrued Expenses	1.46%	2.07%	3.60%
	Short-term borrowings	26.61%	22.22%	0.00%
	Accounts payable	10.35%	11.41%	14.55%
	Income taxes payable	0.11%	0.30%	0.13%
	Total Current Liabilities	39.09%	34.73%	19.25%
LT debt and Obligations		2.76%	5.48%	33.51%
	Total Liabilities	41.85%	40.21%	52.75%
Shareholders Equity
	Common stock	0.00%	0.00%	0.00%
	Paid-in Capital	50.69%	48.76%	36.20%
	Retained earnings	7.47%	11.03%	11.04%
Total Shareholders’ Equity		58.15%	59.79%	47.25%
Total Liabilities & SH’ Equity		100.00%	100.00%	100.00%

Common-Size Income Statement for period ended January 31, 1996-1998

Just for Feet, Inc. Income Statement Years Ending January, 31
		1996	1997	1998
Net sales		100%	100%	100%
Cost of sales		57.54%	58.46%	58.38%
	Gross Profit	42.46%	41.54%	41.62%
Other revenues		0.23%	0.23%	0.17%
Operating Expenses
	Store operating	27.05%	29.18%	30.01%
	Store opening costs	4.38%	1.41%	1.76%
	Amortizations of intangibles	0.07%	0.25%	0.27%
	General and administrative	3.07%	3.77%	3.14%
	Total operating expenses	34.57%	34.60%	35.18%
Operating Income		8.13%	7.17%	6.61%
Interest Expense		-0.32%	-0.30%	-1.04%
Interest Income		1.85%	0.29%	0.02%
EBIT & Change Accounting Principle		9.65%	7.15%	5.59%
Provision for Income Tax		3.43%	2.68%	2.15%
Earnings prior to Change in accounting principle		-0.80%	0.00%	0.00%
	Net Earnings	5.43%	4.47%	3.44%

Financial Risks that the Company Faces

Financial risks affect the ability of an organization to achieve its goals and objectives. Assessment of the financial risk can be done through a multiplicity of approaches. In this report, the use of financial ratios has made it possible to assess the financial risk affecting Just for feet Inc. The financial risks assessed include liquidity, market, credit, economic rate of interest rate, and operational risk. These are the most pertinent risks with regard to Just for Feet Inc. as assessed from the financial ratios. The financial ratios utilized are selected according to their relevance to the assessment of risk over the three years. The performance of the company is represented in the appendices, with appendix 1 showing the income statement and appendix 2 displaying the balance sheet, while appendix 3 is the financial ratios as computed from the financial statements.

Liquidity risk

From the ratio analysis, the company shows a low current ratio as well as a quick acid ratio. These two ratios are used as a measure of the liquidity level of a company. In 1998 Just for Feet Inc. has a current ratio of 2.0, indicating that the level of current liabilities is almost twice that of current assets, which is favorable. However, the high current ratio indicates that the opportunity cost of holding idle cash is significant. The quick acid test ratio is 0.67, which is below the recommended ratio of 1, which is an indication that the company will not be in a position to pay its short-term maturing obligation using the most liquid current assets. However, since Just for feet Inc. deals in products that are highly marketable, a low quick acid test ratio is not the cause for worry as long as the current ratio is favorable.

This may lead to a liquidity risk, which will lead in turn to an adverse effect on the performance of the company. The risk may lead to the low profitability of the company in the future. Liquidity risks normally affect the ability of the organization to attract funding and sustain operational standards. For example, if the current ratio is low, the organization may find it hard to access short-term credit. Short-term credit is a necessary aspect of operational standards considering that it offers the organization an opportunity to remain dynamic in the market.

Market risk

The market risk is associated with the performance of the firm in the entire market. This measures the firm competitive power. Competitive power is a product of the aspects of the goods and services on offer coupled with the manner in which customer satisfaction is achieved. The company has a commendable gross margin ratio where almost 50% of its sales are profits. However, this is followed by a low net profit ratio across the years under analysis. This is an indication that the company is not able to control the expenses associated with satisfying the needs of the consumers. This scenario has affected the profitability of the company to a large extent since a huge proportion of the sales revenues are lost in the process of delivering the goods to the customers. This originates from the fact that the company has a low market power to influence the market price. Low market power may lead the firm to lose its market share to the competitors. The company management should develop strategies hinged on reduction of operating costs in order to enhance the profits.

Credit risk

This risk is associated with a lack of lenders or creditors due to the inability of the company to repay the debts. The company is not specifically prone to this risk since it shows a commendable debt-equity ratio of 0.37. This means that the company operating activities are financed by only 37 percent of the debt-equity. This is an indication that the company will be able to repay its debt. On the contrary, the company has a high inventory age primarily due to a low inventory level. Debts owed to the suppliers take a significantly long period to be repaid, which could indicate challenges with turning overstocks and inventories.

The economic rate of interest risk

The economic interest rate risk is a risk associated with a sudden rise of the rates of interest mainly due to Federal Reserve margins or forces of saving and investments. Such changes are dependent on the external environment which is outside the control of the organization. Over the past years, the interest rates have remained stagnant, making the fluctuations an unlikely event. However, efforts by the organization to prevent such a scenario are necessary, since the future is always unpredictable. The company will be affected by this risk if its debt levels are high and the market rate of interest rises. A high level of debt represents gearing which makes it impossible for organizations to fulfill both long-term and short-term obligations. Rising interest expense compromises the quality of profitability. In a scenario where an organization is not able to service debts, the economic rate of interest risks becomes most pronounced. Creditors and debt-holders are bound to step in to oversee the management of their interests.

The company shows a minimal chance of facing this risk since it has an appropriate debt-equity ratio. A low debt-equity ratio is recommended. The fluctuation in interest rates may result in adverse situations within the company, leading to significant challenges. The management should develop strategies of maintaining a low debt level and finance most of the company activities through retained earnings and shareholders’ equity. This will create minimal chances of occurrence of the economic rate of interest risk.

Operational risk

The risk affects the operational activities of the company due to reputation and legal aspects. The asset turnover ratio indicates the operational efficiency of the company. A high turnover ratio indicates that the company is efficiently utilizing its assets to generate funds. Over the years under analysis, the company has increased its total asset turnover from.48 to 1.07. This indicates that there is increased efficiency in the utilization of the existing assets in the generation of returns. The performance of the company portrays a certain image to the entire society. The reputation obtained from society will influence the sales level or performance of the company. The company has an average performance and needs to develop measures of improving its performance to gain more sales. This will make the company’s operational activities standardized. The company will remain in operation with minimal chances of inefficiency. The company faces financial risks that should be addressed by the managers through the institution of recovery strategies.

Appendices

Appendix 1: Just for Feet Inc Income statement for 1996-1998

Just for Feet Inc INCOME STATEMENT For the period Ended January 31
				1,996	1,997	1,998
				$	$	$
Sales				119,819	256,397	478,638
Cost of sales				68,969	147,526	279,816
Gross Profit				50,850	108,871	198,822
Franchise fees & Royalties earned				485	581	1,101
				51,335	109,452	199,923
Operating Expenses:
Store Operating				33,264	69,329	139,659
Store Opening costs				2,712	11,240	6,728
Amortization of intangibles				157	–	1,200
General & Administrative				3,575	8,058	18,040
				39,708	88,627	165,627
Operating income				11,627	20,825	34,296
Interest expense /income				2,931	3,918	-76
				14,558	24,743	34,220
Income( loss) before taxes
Provision for income taxes				4,836	8,783	12,817
The cumulative effect of changes of
accounting principle				9,722	15,960	21,403
Cumulative effect on prior year				–	2,041	–
Net Income ( Loss )				9,722	13,919	21,403

Appendix 2: Just for feet Inc. balance sheet for 1996-1998

Just for Feet Inc Balance sheet For the period ended January 31
					1,996	1,997	1,998
					$	$	$
ASSETS
Non current assets
Property Plant & Equipments					23,388	54,922	94,529
Repurchased Franchise Rights , Net					3,293	3,113	2,913
Goodwill Net					–	–	36,106
Marketable securities					22,647	–	–
Other assets					550	3,056	3,637
Total					49,878	61,091	137,185
Current assets
Cash & cash equivalents					96,854	138,785	82,490
Marketable securities available for sales					32,634	33,961	–
Merchandise inventories					56,637	133,323	206,128
Account receivables					3,410	6,553	15,840
Other current assets					4,166	2,121	6,709
Total					193,701	314,743	311,167
Total assets					243,579	375,834	448,352
LIABILITIES & SHAREHOLDERS EQUITY
Current Liabilities
Short- term Borrowing					55,000	100,000	90,667
Accounts payable					22,269	38,897	51,162
Accrued Expenses					2,777	5,486	9,292
Income Taxes					3,552	425	1,363
Current Maturities on long term obligations					1,120	2,106	3,222
Total current liabilities					84,718	146,914	155,706
Long term obligations					6,696	6,488	16,646
Deferred Lease rentals					1,580	3,036	7,212
Deferred income taxes					1,317	840	704
					9,593	10,364	24,562
Total liabilities					94,311	157,278	180,268
Shareholders’ equity
Common stock-par value $0.0001;70,000 shares
Authorized
Paid in capital					135,124	190,491	218,616
Retained Earnings					14,144	28,065	49,468
Total shareholders’ equity					149,268	218,556	268,084
					243,579	375,834	448,352

Appendix 3: Financial Ratios

Ratio calculation
					1996	1997	1998
Current ratio= Current assets/Current liabilities					2.29	2.14	2
Quick ratio= ( Current assets- Inventory)
		Current liabilities			1.62	1.23	0.67
Debt to assets ratio= Total debts					0.35	0.39	0.37
	Total assets
Time interest earned ratio=Earning before interest & Tax					3.97	5.32	4.32
		Net interest expense
Long term debt to equity= Debt					0.07	0.05	0.11
		Equity
Inventory Turnover=			Cost of Sales		1.22	1.11	1.36
			Inventory
Age of inventory =			365 days	299 days		328 days	268 days
			Inventory turnover ratio
Total Assets Turnover= sales					0.49	0.68	1.07
	Total assets
Gross Margin= Gross profit/sales *100%					42.44	42.46%	41.54%
The profit margin on sales = Net profit / Sales *100%					8.11%	5.24%	4.47%
Return on total assets= EBIT / Total Net Assets *100%					4.77%	5.53%	7.65%
Return on equity = Net income / shareholders’ equity *100					6.51%	6.37%	7.98%