Answer 2(a): Price Earnings Ratio This is market prospect ratio and it calculates the market value of the stock in relation to the earnings per share. It indicates that what the market is prepared to pay for stock looking into its current earnings. The price earnings ratio of Urban Outfitters has grown from 13.87 in the year 2008 to 24.10 in the year 2009. The ratio has increased almost two folds in one year. A high price earnings ratio point toward a positive future performance of the company and the investors are always interested in buying the stock. It is an indication of higher performance and future growth. Inventory Turnover Ratio This is an efficiency ratio and it measures the efficiency of the company in managing its inventory. …show more content…
It shows the investors that how liquid the inventory of the company is. This ratio measures and shows that how easily a company can turn its inventory or merchandise into cash. The increase in the ratio clearly indicates that the management of the company is managing its merchandise in an efficient and effective manner and it is also contribution to the profits of the company. Answer 2(b): Return on Equity It is a profitability ratio and it calculates the ability of the company to produce profit from the investments of its shareholders. It shows the profit generated by each dollar of shareholder’s equity. It is important ratio because investors always see that how efficiently and effectively the management of the company is using their wealth to generate profit. The return on equity for the company stood at 18.71% in 2009 as compared to 20.90% for the year 2008 which shows a declining trend. The investors are always keen to see high returns on their investments, but here the return on their equity is declining. It is a negative number for the company and if the trend continues the investors will lose the confidence in the company and will cease to invest in the company. Current
There is increase in the company's revenue and Earnings per share (EPS) which will attract investors to invest their money in the company (finance/accounting).
Market value ratios look at the correlation between a company’s stock prices compared to its revenues (Cornett et al., 2015, p. 61). These figures are calculations of a company’s future performance, by market analysts. If a company’s other financial ratios are good, this will most likely reflect in its market value ratios. The price-earning ratio (calculated by dividing market price per share by earnings per share) is indicative of how much investors will pay for each earned dollar of revenue earned by an organization, i.e. how much an investor can expect to spend to earn a dollar of the company’s earnings (Investopedia, Price-Earnings Ratio - P/E Ratio, n.d.). The following are the P/E ratios for both Ford and GM:
The ratio analysis reveals that over the years, the profitability of the company is improving. In terms of net profit margins, the company has made an applausable leap from -25.8% to 2.6% over the years.(2009-2013 ) This year the net profit margin of the company has surpassed industry benchmark of 2%.
Operating profit ratio This ratio expresses the relationship between operating profit and sales. It is worked out by dividing operating profit by net sales. With the assistance of this proportion, one can judge the administrative proficiency which may not be reflected in the net profit rate.
There are various number of ratios to investigate company’s return on investment. Investors always relay on the higher return ratio the more investor look for.
It is a profitability ratio that compares the gross margin of a business to the net sales. This ratio
In terms of solvency, the company’s position is not very strong as the company is maintaining an equal proportion of debt in comparison to equity. The company is earning approximately six times its interest expense.
This ratio show a how many times the working capital has been employed in the process of carrying on the business. Higher the ratio, better the efficiency in the utilization of working capital.
This shows how effectively inventory is managed by comparing the cost of goods sold with average inventory for the period.
These ratios measure the aspects of profitability like rate of profit on sales, whether the profits are increasing or decreasing.
Profitability ratios are used to measure the company’s performance in terms of profit earned by the company after deducted all costs & expenses. Common profitability ratios which are used to measure the company’s profitability are- Return on assets (ROA), Return on equity (ROE), Return on investment (ROI), Return on sales (ROS), Operating margin (OM) and Gross profit margin (GPM).
Profitability ratio is to measure the efficiency of a business and profits generate by the business.
Profitability ratiois a financially sound business will show of profit year after year. Part of the profit are typically set aside as reserve, which adds further strength to the business.
Today, businesses need to utilize many tools to maximize profit and stay alive in the market. Several companies often look at financial ratios to better understand a company’s financial condition and their performance. All of the ratios play a large role in these companies, both individually, as well as collectively.
The price earnings ratio measures the relative valuation of earnings, (Block, 2005). This is a way of looking at how your company's stock earnings compare to other companies both within and outside your industry. This ratio is affected by many variables like marketability, sales growth, and the debt-equity structure of a company.