Choice
Yahoo! Inc. (sign yhoo) and Google Inc. (goog) were selected. Industry is „ Internet information providers“ and sector „technology“, by yahoo terminology (finance.yahoo.com January 5 2014). Google.finance uses sector: „techology“ and industry: “search engines“. (www.google.com/finance, January 5 2014) In literature it is advised to compare firms of „roughly the same size“ and „similar products and services“ (Moles, Parrino and Kidwell 2011:116), which is modestly achieved, as size ratio between companies changes substantialy during 5 years.
For bouth companies, balance sheets and income statements were downloaded from www.marketwatch.com (The Wall street Journal, January 8 2014). In that source, data on 5 years (instead of required 4) were provided, which would enable calculations of some average ratios where values in the beginning end the end of a year are necesarry. This was not used, and all calculated ratios were done with end year data.
It is noticable that the numbers provided by www.marketwatch.com are given with different precision, but generally with no more that 2 significant digits. This is though neglected in further calculations, and no statistical interpretation of significant digit is given. Clearly, this implies that rounding mistakes are unavoidable.
As not all data from Balance Sheet (BS) and Income satement (IS) is necesarry for required ratio calculations, for the purpouse of easier display some rows are hidden.
Picture 1 shows income statement and picture 2 balance sheet in their simplified form, with some rows hidden. Rows that are not shown are mostly the ones with no dana (zeroes), the ones that are allready included in other numbers and some rows less relevant for calculating given ratios. Rows used for direct calculations are designated with colours, to be more easyly visible.
Picture 1, Balance sheet, Yahoo! Inc. (YHOO) and Google Inc. (GOOG), Y:2008-2012
Picture 2: Income statement Yahoo! Inc. (YHOO) and Google Inc. (GOOG), Y:2008-2012
Profitability ratios
Profitability ratios measure „management´s ability to make efficient use of firm´s assets to generate sales and manager firm´s costs“ (Moles et al 2011:132).
Operating margin (OM)
There are some variations regarding the use of Operating Margin. So „operating profit is tipically measured with EBIT“. (Moles et al 2011:132). Also,: „ Often non-recuring cash flows are excluded as they don´t represent company´s true performance“ (Valueclick, 5 January 2014). Mathematically looking, when computing a ratio, in the denominator of formula 1, net sales are present. Number in the numerator should thuse also be a number coneccted to sales in some way.
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.
Financial ratios are "just a convenient way to summarize large quantities of financial data and to compare firms' performance" (Brealey & Myer & Marcus, 2003, p. 450). Financial ratios are very useful tools in order to determine the health of a company, help managers to make decision, and help to compare companies that belong to the same industry in order to know about their performance.
Ratio of profitability is distinct to examine a firm’s ability to produce cash flow which is comparative to some metric. This is to establish the amount invested in the company. This ratio analyses and a...
Profitability ratios express ability of the company to produce profit. This shows how well a company is performing in a given period of time. To compare the profitability for the companies, the investors use profitability ratios that are return on equity, profit margin, asset turnover, gross profit, earning per share. Return on asset indicates overall profitability of assets. It is the relationship between net income and average total assets. GM has 0.034 and Ford has 0.036. This indicates Ford is more profitable. Profit margin is how much of every dollar of sales the company keeps. Computing profit margin, net income divided by net sales. This indicates higher profit margin is more profitable and it has better control. Thus, GM’s profit margin is 3.4 percentages and Ford’s is 4.9 percentages. This indicates Ford has better control profitably compared to GM. Next ratio is gross profit rate. It is how much of every dollar is left over after paying costs of goods sold. Assets turnover represents how efficiency a company uses its assets to sales. This ratio is relationship between net sales and average total assets. GM’s is 0.98 and Ford’s is 0.75. This result represents GM is using its assets more efficiently. Gross profit margin is dividing gross profit, which is equal to net sales less cost of gods sold, by net sales. This ratio indicates ability to maintain selling price above its cost of goods sold. GM’s gross profit rate is 11.6 percentages. Ford’s is 5.7 percentages. GM is higher ratio, and it indicates strong net income. Also, it indicates the company has to spend lower operating expenses and the company is able to spend left money for covering fixed costs. Earnings per share indicate the company’s net earnings to each share common stock. This ratio shows margin between selling price and cost of goods sold. From these companies’ income statement, GM is $2.71 and Ford is $1.82. Because GM’s value is higher relative to Ford’s,
Capital market analysis ratio: this could be gotten by financial analyst by using these formulas
Information from the income statement and the balance sheet are used to calculate financial ratios that are useful when making investment decisions.
Measures of profitability enable a company to evaluate its profits with respect to a given level of sales, a certain level of assets, or the owners’ investment (Gitman et al., 2015). Essentially, a company can compare its expenses and other relevant costs incurred during a specific period of time. Companies use the net profit margin to measure the percentage of each sales dollar remaining after costs and expenses – the higher a company’s net profit margin, the better (Gitman et al., 2015). Figure 4a indicates that IPG’s net profit
Gross profit ratio is a profitability ratio that shows the relationship between gross profit and total net sales revenue. The ratio is computed by dividing the gross profit figure by net sales. The basic components of the formula of gross profit ratio are gross profit and net sales. Gross profit is equal to net sales minus cost of goods sold. Net sales are equal to total gross sales less returns inwards and discount allowed. The information about gross profit and net sales is normally available from income statement of the company. The ratio can be used to test the business condition by comparing it with past years’ ratio and with the ratio of other companies in the industry. A consistent improvement in gross profit ratio over the past years is the indication of continuous improvement. When the ratio is compared with that of others in the industry, the analyst must see whether they use the same accounting systems and practices.
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.
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
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.
Figures were obtained from comparative balance sheets and profit and loss statements from the relevant years as well as additional information that was forwarded by the board. This information enabled the development of percentage and ratio analysis (see appendices), which was then used to create the report.
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.
It is important to understand how the profit margins of the company have been earned and this can help predict the prospects of survival or otherwise when bad times
There are 2 types of Profitability Ratios which will be discussed below namely ; Gross Profit Margin and Return on Capital Employed.