Financial ratios are important because it takes information from an organizations financial statements and calculates the information into useful information that can be compared to other organization within the same industry. Financial ratios also inform management and investors how well the organization is performing financially and the organizations operating efficiency and profitability. Financial ratios are also important to banks and financial institutions because these ratios determine the credit worthiness of the organization in order to see how well they are paying back their lenders and vendors in order to determine if the organization needs a loan or line of credit, how much of a risk the organization is.
Section 2 & 3 - Notes (m = millions of dollars) and for Net Income – NI available to common stockholders was used
1. Net Profit Margin informs a business owner of how much money is left over for every dollar generated in revenue after expenses and taxes. This is an after tax profit for the company. To generate the ratio, Net Income After Taxes divided by Revenue equals Net Profit Margin
Net Profit Margin = Net Income $1,267m / Net Sales $4,980m = 0.2544 or 25.44%
After all expenses and taxes have been paid, Garners’ Platoon will have 25.44% profit remaining. The higher the net profit margin shows how effectively the company is able to convert their sales into profits and control costs. In the industry that Garners’ Platoon Mental Health Care falls into, the industry standard for profit margin is 18.75%. Garners’ Platoon is approximately 36 percent higher than the industry.
2. Basic Earnings Power ratio is used to measure the operating return of the organizations assets. Also known as BEP, shows the operat...
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...ould end up taking a loss on obsolete inventory. The Average Collection Period is 9.72 days lower than the industry standard. This means that Garners’ is able to collect their money from sales generated 9.72 day faster. This of course helps lower their accounts receivable on their balance sheet and they have an effective system in place to collect their outstanding A/R.
Market Values Ratios are flat when comparing Garner’s to the industry standards. This means that Garners’ pricing matches what the market will bear but could the company have higher ratios if their Liquidity ratios were better.
Works Cited
Adair Jr., T. A., Cornett, M. M., & Nofsinger, J., (2012). Finance: Applications and Theory, Second Edition. New York, NY.McGraw Hill.
Investorwords.com. (2013). Definitions. Downloaded from the World Wide Web November 15, 2013 from www.investorwords.com
This requirement makes it important to look through a majority of the return ratios, which include return on sales, return on assets, and return on equity. Additionally, investors are also interested in the ratios related to the company’s earnings, such as earnings per share (EPS) and PE ratio. Looking at return on sales, we can see that Wendy’s has a 7.27% return on sales and Bob Evans has a 1.23%, which demonstrates Wendy’s has a higher profit margin. Moreover, Wendys’ return on assets is 2.85% and Bob Evans is 1.58%. Also, Wendy’s and Bob Evan 's have return on equity ratios of 6.66% and 4.30%, respectively. All of these return ratios show that Wendy’s has a better handle on turning working capital into revenue. On the other hand, although Wendy’s return ratios are higher than Bob Evans, Bob Evans has a better performance on earnings per share and PE ratio. This is due to Bob Evans having less common stock share outstanding, which makes their earnings per share and PE ratio higher than Wendy’s. Due to the EPS being higher for Bob Evans, we would recommend that investors look towards Bob
Using the 5 different ratio analysis used earlier to analyse BMO life insurance company’s Q2-2015 Consolidated Income statement and Q2-2015 Consolidated Balance sheet. BMO’s profit margin is 9.79%1. Meaning BMO earns more net income per $1 of sales than some or even most of its competitors. This can be rated as favorable in comparison to its industry average of 9.58%. BMO’s days’ sales uncollected is 21.84days2 favorable when compared to its industry’s average of 98.59 days. This means that BMO can liquidate it receivables in lesser days than some or most of its competitors. BMO’s equity ratio shows that the owners of the company only owns 10.66%3 of the company’s assets. Compared to its industry
The first financial ratio of the analysis is the Price to Earnings ratio (“P/E ratio”). The ratio is computed by dividing the price of one share of common stock, by the earnings per share of common stock. This analysis uses diluted earnings per share which assumes the issuance of new stock for all existing stock options. Also, the price of the stock was computed as an average of the fourth quarter high and low stock prices published in the 10K report of each company, because the year end stock prices were not listed for all the companies. Because the P/E ratio measures the relative costliness of different stocks, in relation to their income, it provides a useful place to begin the analysis.
Troy, PhD., Leo. Almanac of Business and Industrial Financial Ratios. 30th edt. (1999) (page 159) Paramus, NJ: Prentice Hall.
Another highlight of the company was the company’s gross margin, which was 32.8 in 2012, just a little more than the 31.9 in 2011 and their selling rate went down by 20.9
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.
...e overall performance of the company given that the higher the margin, the more likely that the company will retain a profit after taxes have been withdrawn. It is calculated by subtracting the cost of interest from the earnings before income taxes.
It indicates how many times an average inventory is sold in a specific period. An examination of AT&T.'s inventory turnover ratio reveals that there was a continuous increase in the first four years (from 2010 to 2013); however, this ratio slightly went down (from 10.07 to 9.65) in fifth year. The current inventory turnover ratio of 9.65 indicates that AT&T has effectively sold its inventory 9.65 times in the year 2014. The inventory turnover trend in the last five years indicates AT&T Inc. has strong sales performance. The efficiency is turning over inventory is useful to improve liquidity; it will enable AT&T to meet its debt
Net Profit Margin, = Net Loss Income, -206,458 - Net Sales, =1,838.663 = -00.9. I truly believe that marking should have caught this in the middle of the years and done some type of special promotion. To help build up revenue for the Corporation before the end of 2015.With a Corporation like this having financial difficulties, their come competitors fill they have the upper hand.
The calculations of Denver’s return on assets, profit margin, and asset turnover, both with and without the new product line are: The return on asset $12,000/$100,000 = .12 current results, $13, 500/$100,000 = .135 proposed without cannibalization, $12,000/$100,000 = .12 proposed results with cannibalization, next the Profit margin $ 12,000/$45,000 = .27 current results, $13,500/$60,000 = .225 proposed results without cannibalization, $12,000/$50,000 = .24 proposed results with cannibalization, and lastly, Asset turnover $45,000/$100,000 = .45 current results, $60,000/$100,000 = .60 proposed results without cannibalization, and $50,000/$100,000 = .50 proposed with cannibalization. The chart is located in Example A.
It simplifies the comprehension of financial statements. Ratios tell the whole story of changes in the financial condition of the business.
The ratio of 1.7 for the last two years indicates consistency, although a lower number is preferred. As a company produces high value product, this could be a satisfactory ratio. By comparing it to 2011 when a ratio was 2.9, in the last two years a ratio improved
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.
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.
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.