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 is calculated by comparing cost of goods sold with average inventory. This ratio measures the number of times the company has managed to sell its inventory. The inventory turnover ratio of the company increased to 10.89 times in 2009 as compared to 6.6 times of 2008.
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
Ratio This ratio calculates the ability of a company to meet its short term commitments by its current assets. The ideal current ratio is 2. It is an important measure of the liquidity of the company. A high current ratio indicates that the company will be in a position to pay off its short term liabilities by using its current liabilities more easily. It is helpful for the investors and creditors in understanding the liquidity of the company. The current ratio of the company stood at 4.28 for the year 2009 as compared to 4.40 for the year 2008. It shows a decline in the ratio. But a ratio of 4.28 is far better as compared to the ideal ratio of 2. The decline in the ratio will not affect the liquidity position of the company because it is a nominal decline, then also it is worth noting that decline may affect the sentiments and confidence of the investors to some extent. Answer 2(c): The overall changes in the ratios of the company are favorable. The earnings per share increased from $1.20 in 2008 to $1031 in 2009. Profit margin of the company also increased from 10.90% to 11.35%. Overall the company’s ratios are showing an increasing trend. There is a nominal decline in current ratio and return on equity which can be due to some other extraordinary reason. Overall the ratios reveal that the performance of the company is good and there has been a favorable increase in key ratios.
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%.
Ratio analysis helps in the evaluation of the liquidity, working productivity, benefit and solvency of a
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.
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.
It is a profitability ratio that compares the gross margin of a business to the net sales. This ratio
Return On Equity (ROE) is a profitability ratio that measures the ability of a firm to generate profits
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).
Members of a firm such as financial managers and accountants, prospective and current investors, prospective creditors, and accounting students, as well as many more people who may use these ratios. Although all persons listed above might use these ratios, they may have different motives for calculating these ratios. These ratios, when applied to different people, continually have the same meaning behind what they represent and stand for. All who calculate these ratios most commonly are looking to assets the company’s financial standing and position. The firm itself will be looking to find weak points in the business and see where and what changes need to be made.The firm looks for internal control purposes within the budgetary process and isolate problems before they get too big. The accountant uses these ratios to calculate information for other members of the firm to be able to interpret the company’s standing. Prospective and current investors may use these ratios to look into companies they have invested in or plan on investing in, to see what may be a proper investment, based on liquidity, potential, value and earnings. Prospective creditors would use these ratios to determine payback ability. Accounting students may use these ratios to simply crunch numbers, it does not have meaning besides where and when the calculation is applied. Many people can use these ratios if they have proper information to understand how well a
Profitability ratio is to measure the efficiency of a business and profits generate by the business.
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.