Evaluating a company’s financial condition can be done by looking at its profitability or its ability to satisfy long-term commitments. These measures can be viewed through an analysis of a company’s financial statements, including the balance sheet and income statement. This paper will look at the status of Scholastic Company’s (Scholastic) ability to satisfy its long-term commitments and at the profitability of Daktronics, Inc. (Daktronics). This paper will include various financial ratio calculations and an analysis of the notable trends. It will also discuss the profitability and long-term borrowing positions of the firms discussed. Scholastic Company is a multibillion dollar children’s book publisher and distributor with more than 9,000 worldwide employees (Scholastic Inc., n.d.). Scholastic leases some of its physical office and storage locations and equipment (as cited in Gibson, 2011). Cornaggia, Franzen, and Simin (2013) noted the reasons firms lease may be the result of a company’s financial distress which prevents sufficient capital being raised to purchase instead of leasing. They also suggested if profitability of the firm is not at issue, leasing can be used to reduce taxes thus reducing borrowing costs. Though the reason for maintaining material lease obligations is not disclosed in its financial statements (as cited in Gibson, 2011), Scholastic’s ability to satisfy its long-term commitments is important for investors, creditors, and management. The long-term borrowing capacity of Scholastic can be determined through an analysis of its times interest earned, fixed charge coverage, and debt ratios. The times interest earned ratio uses a company’s income statement to assess its ability to meet long-... ... middle of paper ... ... Cited Cornaggia, K. J., Franzen, L. A., & Simin, T. T. (2013). Bringing leased assets onto the balance sheet. Journal of Corporate Finance, 22345-360. http://dx.doi.org/10.1016 /j.jcorpfin.2013.06.007 Damodaran, A. (n.d.). Operating versus capital leases. Retrieved from http://pages.stern.nyu.edu /~adamodar/New_Home_Page/AccPrimer/lease.htm Daktronics, Inc. (n.d.). Our company. Retrieved from http://www.daktronics.com/en-us/about-us Gibson, C. H. (2011). Financial reporting & analysis: Using financial accounting information. (12th ed.). Mason, OH: South-Western Cengage Learning. 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 Scholastic Inc. (n.d.). About Scholastic. Retrieved from http://www.scholastic.com /aboutscholastic/index.htm
These ratios can be used to determine the most desirable company to grant a loan to between Wendy’s and Bob Evans. Wendy’s has a debt to assets ratio of 34.93% while Bob Evans is 43.68%. When it comes to debt to asset ratios, the company with the lower percentage has the lowest risk. Therefore, Wendy’s is more desirable than Bob Evans. In the area of debt to equity ratios, Wendy’s comes in at 84.31% while Bob Evans comes in at 118.71%. Like debt to assets, a low debt to equity ratio indicates less risk in a company. Again, Wendy’s is the less risky company. Finally, Wendy’s has a times interest earned ratio of 4.86 while Bob Evans owns a 3.78. Unlike the previous two ratios, times interest earned ratio is measured on a scale of 1 to 5. The closer the ratio is to 5, the less risky a company is. From the view of a banker, any ratio over 2.5 is an acceptable risk. Both companies are an acceptable risk, however, Wendy’s is once again more desirable. Based on these findings, Wendy’s is the better choice for banks to loan money to because of the lower level of
Reimers, Jane L. (2003). Financial Accounting A Business Process Application. Upper Saddle River, New Jersey, Prentice Hall.
Donal E. Kieso, Wegandt J. Jerry, Warfield D. Terry. (2012). Intermediate Accounting. Hoboken, NJ: Wiley.
Romney, Marshal, and Paul Steinbart. Accounting Information Systmes. 10th ed. Upper Saddle River: Pearson Education, 2006. 193-195.
The lessee must record the rights and obligations associated with all leases as a right-of-use (ROU) asset and a corresponding liability with the present value of future lease payments. In another word, the impact on the balance sheet for both capital and operating leases is the same at original recognition. However, the effect on the subsequent income statement and cash flow would be significant different based on the lease’s classification. For income statement purpose, lessees of capital leases should recognize amortization expense on ROU asset and interest expense on the lease liability separately, whic...
An alternative to traditional equity and debt financing is leasing. Leasing is undertaken primarily for what purposes?
...To check how successful it has been, we calculate debtor collection period ratio. (Dyson, 2004) Fixed Asset turnover: In this ratio, we seek the amount of sales that can be generated (or the amount of fixed assets necessary to achieve a level of sales) from a given level of fixed assets. (Klein, 1998) Total asset turnover: This ratio determines that how efficiently a firm is utilizing its assets. If the asset turnover ratio is high, the firm is using its assets effectively in generating sales. If this ratio is low, the firm may not be using its assets efficiently and shall either increase sales or eliminate some of the existing assets. (Argenti, 2002) Solvency Ratio Gearing: Gearing reflects the relationship between a company’s equity capital (ordinary shares and reserves) and its other form of long-term funding (preference share, debenture, etc.) (Black, 2000)
Marshall, M.H., McManus, W.W., Viele, V.F. (2003). Accounting: What the Numbers Mean. 6th ed. New York: McGraw-Hill Companies.
When starting a business an important question arises, how to finance the company. The steady economic growth combined with low interest rates has produced a lot of liquidity in debt and equity markets. For example, in 2005, non-financial corporate business borrowing increased dramatically to $289 billion, compared to the mere $174 billion it was in 2004 and the $85 billion it was in 2003 (Chung). The outcome of using only debt financing or only equity financing is mostly direct. Businesses run ino the issue when a company’s finance requires both debt and equity characteristics, changing the tax effects greatly (Hanke).
Ratio analysis are useful tools when judging the performance of a company by weighing and evaluating the operating performance (Block-Hirt). There are 13 significant ratios that can separate by four main categories, profitability, asset utilization, liquidity and debt utilization ratios. The ratio analysis covered here consists of eight various ratios with at least one from each of these main categories. These ratios were used to compare and contrast the performance of Verizon versus AT& T over the years 2005 and 2006.
Information on the financial statement can offer an overview of a company’s performance over the past fiscal year. However, gaining crucial investment insights requires financial manipulation that yields financial ratios.
The article Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy was written in 1968 by Edward I. Altman. The purpose of the article is to address the quality of ratio analysis as an analytical technique. At the time, some academicians were moving away from ratio analysis and moving toward statistical analysis. The article attempted to determine if ratio analysis should be continued, eliminated and replaced by statistical analysis or serve together with statistical analysis as cofactors in financial analysis. The example case used in the article was the prediction of corporate bankruptcy.
References Financial Accounting Standards Board. 2006, July 6 -. Conceptual Framework for Financial Reporting. Financial Accounting Series, 1-55. Wolk, H., Dodd, J., & Tearney, M. (2003).
Gelinas Jr., U. J., Dull, R. B., & Wheeler, P. R. (2012) Accounting Information Systems (9th ed.) Ohio: South Western Cengage Learning
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.