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Profitability analysis of a company
Comparative financial ratio analysis
Comparative financial ratio analysis
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The purpose of this course project report is to provide an analysis to the management of the selected companies progress in Profit standpoint. I have chosen the two companies of Microsoft and Oracle operate within the same market. Both the companies are competitors for many years in the IT industry. The data information used for this analysis collected from each company’s June 2016 financial statements. Both the companies provide a vast variety for products and services. This analysis of these two company’s findings hold present values and information acquired from financial statement of Microsoft and Oracle. This analysis of this two companies provide the recommendation to the management from the profit standpoint to determine with certainly …show more content…
It determines ability of the company to pay any outstanding debt on interest expense. Interest coverage ratio is equal to earnings before interest and taxes (EBIT) for a time period, often one year, divided by interest expenses for the same time period.
EBIT/Interest Coverage
Formula:
Interest Coverage= -1 * Operating Income/Interest Expense
No. Microsoft – For the Fiscal Year June 30,2016 Oracle – May 31,2016
1. -1*20,182,000/-1,243,000= 16.24% -1*12,604,000/-1,467,000= 8.59%
Above calculation shows Oracle have less debt compare to Microsoft. This information shows Oracle have better ability to pay back debt when compared to Microsoft.
Valuation Ratio
A valuation ratio is a measure of how cheap or expensive a security or business is, compared to some measure of profit or value. This gives an idea for cost of own the business of a company which is free of debts. It also compares the share price to the value of the company’s assets.
Market-to-Book Ratio
Formula:
Market-to-Book Ratio = (Total equity- preferred stock)/ outstanding shares
No. Microsoft Oracle
1. (71,997,000-0)/8,013,000= 8.99% (47,790,000- 0)/4,305,000=
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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.
Asset Turnover
Formula:
Asset Turnover = Revenue / Average total assets
No. Microsoft Oracle
1. 85,320,000/((174,472,000+193,694,000)/2)= 46.35% 37,057,000/((110,903,000+112,180,000)/2)= 33.22%
The above calculation shows that Microsoft uses the assets more efficiently than Oracle. Microsoft applies the assets to compensate for expenditures and in turn it generates more revenue.
Return on Equity (ROE)
Formula:
ROE = Net Income / (Shareholder’s Equity (total Equity of Previous year + Current Year/2))
No. Microsoft Oracle
1. 3,122,000/(8,013,000+80,083,000)/2)= 7.08% 2,814,000/((4,305,000+48,663,000)/2))= 10.63%
ROE calculation is also an indicator how management using equity to fund operations for the grow the company. High return on equity ratio indicates that the company is using its investors ' funds effectively. In the above data calculation Oracle provides the higher return rate ratio when compared to Microsoft.
Return on Asset
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
Equity ratio and debt ratio are both very important because it shows how much of the assets used for production is really owned by the owner of a company. According to calculations in the appendix, RBC has the highest equity ratio and the lowest debt ratio. This is considered favourable compared to Sun life and BMO’s equity and debt ratio. When it comes to return on total assets BMO has the highest return. Meaning it is earning more per assets than RBC and Sun
Return on sales is decreasing and is below the industry average, but the goods news is that sales and profits have been increasing each year. However, costs of goods are increasing and more inventory is left over each year causing the return on sales to decrease. For 1995, it was 1.7% which is less than the average of 2.44% but is a lot higher than the bottom 25% of companies as seen in exhibit 3, which actually have negative sales return of 0.7%. Return on equity is increasing each year and at a higher rate than industry average. In 1995, it was 20.7%, greater than the average of 18.25% and close to the highest companies in exhibit 3, of 22.1% showing that the return in investment in the company is increasing, which is good for the owner.
Return on equity (ROE) measures profitability from the stockholders perspective. The ROE is a calculation of the return earned on the common stockholders' investment in the firm. Generally, the higher this return, the better off the stockholders are. Harley Davidson's return on equity was 24.92% for 2001, 24.74% for 2000. They have sustained consistent, positive, returns for their shareholders for the past two years.
When analyzing the time interest earned ratio, the higher ratio is better. Since Jones Inc.’s most recent ratio is 2.7356, this means that they could cover their interest expenses about 2.7 times or that Jones Inc.’s income is about 2.7 times higher than interest expenses. Higher ratios are better because they indicate a company’s ability to honor their debt commitments; high ratios are less risky. Over time, Jones Inc. has maintained a ratio varying slightly around 1.75. This ratio has increased for Jones Inc. in the past year because they paid off significant debt. Before this increase, their ratio was a little lower than their competitor’s. An investor who is solely concerned with this ratio will prefer a company with the higher ratio. Now that Jones Inc. has surpassed its competitor, it is more attractive to investors. Depending on their future funding from debt, they should continue with the same ratio, and even increase
Description: Return on Equity (ROE) indicates what each owner’s dollar is producing in terms of net income that is the rate of return on stockholder dollars. ROE is a common metric for assessing the value of a firm and most investors look to ROE first when deciding where to allocate their capital. As such, it is also an important measure for a CEO to monitor.
The P/E ratio indirectly includes key fundamentals of a company such as future growth and risk. It basically takes into account the following aspects:
Return on capital employed (ROCE) expresses a company’s profit and displayed as a percentage of the amount of capital invested in the company. ROCE interprets “capital employed” as the total amount of money invested in the company in the long term, regardless of whether that money has been supplied by shareholders or lenders. This amount will compared with the return achieved on that capital. The results were shown that Wm Morrison Supermarkets are higher than Tesco by 4.55 per cent.
Ratios for return on assets and return on equity offer support for the loss in stockholders’ equity. Return on assets went from 13.1 in 2000 to 5.1 in 2001 and return on equity dropped from 25.4 in 2000 to 8.7 in 2001. Return on equity represents return on assets divided by the difference of 1 and debts/assets.
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.
Next, I have ROE of 8.99%, 9.52%, 10.19%, and 11.05%. Based on the calculations on the above, ROE is rising when CPK takes on more debt and becomes more leveraged. Moreover, ROE of CPK increased because of CPK is expanding their business by using higher debt for a CPK’s operation.
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.
I have leant that ratio analysis offers better insight of a company’s financial position on the short-term and long-term basis. However, I would recommend that investor advice should be based on ratio analysis that considers ratios from several years. This will ensure that the investor is making an informed decision based on the company’s financial ratio performance trend.
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.
The analysis of these ratios shows how Ford stands as a company for the past five years. Return on equity (ROE) reveals how much profit a company earned in comparison to the total amount of shareholder equity on the balance sheet. For long-term investing with great rewards, companies that have high return on equity ratios can provide the biggest payoffs. This ratio also tells investors how effectively their capital is being reinvested, so it is a good gauge of management's money handling skills. Ford is showing a considerable turn around in this area this past year, which could easily be due to changes in management. They are also reasonably following the industry in this area.