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Overview of financial statement analysis chapter 1 solutions
Chapter 4 analysis of financial statements
Analysis of financial statement
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1. INTERNAL AND EXTERNAL ANALYSIS
1.1 Financial Statement Analysis
In order to evaluate the financial ratios, this document uses the following analyses to assess the financial statements of the company:
- Common size analysis: displays line items as a percentage of a common figure
- Base-year analysis: compares current data with that of previous year
- Trend analysis: compares the ratio of a firm across different years
- Peer group analysis: compares ratios across companies in the industry
1.1.1 Short-Term Solvency According to the common size analysis, for instance in 2015, the cash & cash equivalent is a major component of the balance sheet; since it represents 30.81% of total assets, which influence positively on the liquidity of
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Liquidity Ratios
On the other hand, the peer group analysis shows that Energizer’s liquidity ratio (i.e. Current ratio) is below the average of the industry. However, if Energizer is compared only to those competitors equivalent in size (i.e. Sales Revenue), its liquidity ratio is in a better position than that of equivalent competitors in the industry (see exhibit 2). Based on the peer group analysis, it can be said that Energizer’s liquidity is adequate.
Exhibit 2. Current Ratio
1.1.2
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1.1.3 Return on Assets (ROA)
The trend analysis shows that Energizer’s ROA declined abruptly from 2014 to 2015 (see exhibit 7). According to the Income Statement analysis, this situation was caused not only by a decline in sales revenues and an increase in Selling, General & Administrative expenses, but also by the deconsolidation of its Venezuelan subsidiaries, which impacted severely the net income.
Exhibit 7. Trend Analysis ROA
On the other hand, the peer group analysis shows that Energizer’s ROA is below the average of the industry. However, if Energizer is compared only to those competitors equivalent in size (i.e. Sales Revenue), its ROA is closer to that of equivalent competitors in the industry (see exhibit 8). Therefore, it can be said that the major competitors of the industry, in general, were also negatively affected in the last year. Perhaps a higher level of competition in the market caused this situation, since the Sales revenues of competitors have also declined.
Exhibit 8. Peer Group Analysis ROA
1.1.4 Return on Equity
Net working capital represents organization’s operating liquidity. In order to compute the net working capital, total current assets are divided from total current liabilities. When there is sufficient excess of current assets over current liabilities, an organization might be considered sufficiently liquid. Another ratio that helps in assessing the operating liquidity of as company is a current ratio. The ratio is calculated by dividing the total current assets over total current liabilities. When the current ratio is high, the organization has enough of current assets to pay for the liabilities. Yet, another mean of calculating the organization’s debt-paying ability is the debt ratio. To calculate the ratio, total liabilities are divided by total assets. The computation gives information on what proportion of organization’s assets is financed by a debt, and what is the entity’s ability to pay for current and long term liabilities. Lower debt ratio is better, because the low liabilities require low debt payments. To be able to lend money, an organization’s current ratio has to fall above a certain level, also the debt ratio cannot rise above a certain threshold. Otherwise, the entity will not be able to lend money or will have to pay high penalties. The following steps can be undertaken by a company to keep the debt ratio within normal
The first method we will review is the accounting method. Through this accounting approach we will analyze specific ratios and their possible impact on the company's performance. The specific ratios we will review include the return on total assets, return on equity, gross profit margin, earnings per share, price earnings ratio, debt to assets, debt to equity, accounts receivable turnover, total asset turnover, fixed asset turnover, and average collection period. I will explain each ratio in greater detail, and why I have included it in this analysis, when I give the results of each specific ratio calculation.
The first thing to analyze is GE’s capacity to pay its debts as they come due or in other words its liquidity. GE consolidated liquidity position is adequate. GE’s liquidity is supported both by the firm’s consistent earnings track record and its ability to quickly divest business or assets to fit its strategic goals. Consolidated cash and equivalents were $8.3 billion. On a consolidated basis GE had a total of around $56 billion of contractually committed lending arrangements as well as numerous other sources of liquidity. General Electric, a triple-A rated, frequent borrower, is in a stable position with regards to liquidity. Its issuance policy is not based on market outlook but rather on a planned program of issuance to support its ongoing financial businesses and its addition of assets.
I will be comparing five types of financial ratios through statement of comprehensive income and balance sheet, as follows:
In regards to the corporation’s balance sheet, it is necessary to place an importance on liquidity ratios to demonstrate the company’s ability to pay its short term obligations such as accounts payable and notes that have a duration of less than one year. These commonly used liquidity ratios include the current ratio, quick ratio, and cash ratio. All three ratios are used to measure the liquidity of a company or business. The current ratio is used to indicate a business’s ability to meet maturing obligations. The quick ratio is used to indicate the company’s ability to pay off debt. Finally the cash ratio is used to measure the amount of capital as well short term counterparts a business has over its current liabilities.
Firm E also has higher technological capability to reach out to market segment that our firm dominates. It has also been noted that the stock price of Firm E rose $7 to $50, increasing its value and giving the firm an incredible amount of capital to be invested for market capture. It has also been identified that our firm mostly compete against other players in market segments that are more price sensitive than those in others. This generally results in generating low returns when the cost of competition is high. For this particular market segment, however, price-based competition does not necessarily lead to increases in the size of the marketplace. Although, price-based competition is minimized with minimal gross margin for economy products, this competition could be intensified by providing our customers with rebates, preferred financing and long-term warranties. With such immediate capital available at hand, firms such as Firm E can attract our customer at its
Ratios analysis also makes possible comparison of the performance of different divisions of the firm. The ratios are helpful in deciding about their efficiency or otherwise in the past and likely performance in the future.
By taking into account only the most liquid assets, ratio 1.0 in 2013 and 2012, which increased by a small margin 0.2 from 2011, indicates that company has strong liquidity position.
Monea, M. (2009). Financial ratios – Reveal how a business is doing? Annals of the University Of Petrosani Economics, 9(2), 137-144. Retrieved from http://www.upet.ro/eng
This section will discuss ratio analysis for the following ratios: current ratio, quick (acid-test) ratio, average collection period, debt to assets ratio, debt to equity ratio, interest coverage ratio, net profit margin, and price to earnings ratio. Depending on the end user which ratio carries more importance, however, all must be familiar with ratio analysis. Details on each company's performance for each of these areas can be found in the attached ratio analysis worksheet.
The Quick Ratio shows that the company’s cash and cash equivalents are the highest t...
Ratios traditionally measure the most important factors such as liquidity, solvency and profitability, as well as other measures of solvency. Different studies have found various ratios to be the most efficient indicators of solvency. Studies of ratio analysis began in the 1930’s, with several studies of the concluding that firms with the potential to file bankruptcy all exhibited different ratios than those companies that were financially sound.
Organizations use financial statements and ratio analysis assess financial performance viability. The ratio analysis are used to identify trends and to perform organizational comparison (financial) with other companies within same industry. Ratio analysis, using data reported on the financial statements, are divided into five major categories: common size, liquidity, solvency, efficiency, and profitability. This paper will assess the financial stability of John Hopkins Hospital (JHH) using the five ratio analysis.
Any successful business owner or investor is constantly evaluating the performance of the companies they are involved with, comparing historical figures with its industry competitors, and even with successful businesses from other industries. To complete a thorough examination of any company's effectiveness, however, more needs to be looked at than the easily attainable numbers like sales, profits, and total assets. Luckily, there are many well-tested ratios out there that make the task a bit less daunting. Financial ratio analysis helps identify and quantify a company's strengths and weaknesses, evaluate its financial position, and shows potential risks. As with any other form of analysis, financial ratios aren't definitive and their results shouldn't be viewed as the only possibilities. However, when used in conjuncture with various other business evaluation processes, financial ratios are invaluable. By examining Ford Motor Company's financial ratios, along with a few other company factors, this report will give a clear picture of how the company is doing now and should do in the future.
The debt ratios increased by 2.7% to 57% more than double the industry standard of 24.5%. The long term debt increased from $700,000 to $ 1,165,250 an increment of 66.5% in the year 2002. The company is currently highly leveraged thus it needs to work on reducing long term debts and continue to increase assets. The times interest earned ratio dropped by 0.3 to 1.6 in the year 2003. The company could face difficulties making interest payments in case of a sales slump.