Question

Company	Profit Margin	Return on Equity	Current Ration
Regions Financial	31.79%	10.2%	0.04%
Bank of America	31.74%	10.57%	0.41%
Wells Fargo	26.44%	11.29%	0.25%

Build a table showing the three companies and the three ratios and conduct an analysis of comparison.

1. Based on your interpretation of the ratios, which companies seem to be doing better and why?
2. Are your findings and interpretations consistent with how you viewed the company prior to your research? If not, what is different and why?
3. What unanswered questions do the ratios not address and how might you go about addressing these questions?

Answer 1

Hello there. Here is the answer to your question. Hope it helps. You haven't given enough data for answer to point b. but I will try to give some pointers for the same.

For sake of simplicity, Company Regions Financial is 'R', company Bank of America is 'B' and company Wells Fargo is 'W'.

a. Based only on profit margin ratio, R is best among the three. But when we also consider Return on equity, we can see that W is doing better than R and B. And when we consider current ratios, we can see that R is having very low current ratio of 0.04%, whereas B is having a best current ratio of 0.41%.

If we consider all three ratios together, company B seems to be best in terms of current ratio, with very small difference in profit margin of it as compared to the best profit margin of 31.79%. But it lags in return on equity with 10.57% from the best among the three which W has at 11.29%. So company B seems to be doing best in current ratio, almost best in profit margin and is second in return on equity.

W is best in return on equity but lags in profit margin and is second best in current ratio.

R is best in profit margin, last in return on equity and also last in current ratio with very low current ratio.

b. Prior to the research, we thought that R is the best among the three, based on profit margin it has. But when we see the return on equity and the current ratios, it seems as being the last among the three. So with other ratios coming into picture, the opinion has changed drastically and other ratios together with profit margin give a better picture about the health of a company.

c. These ratios still not show how much actual sales the three companies made, what is the growth rate in sales, what is the raw material turnover, inventory turnover, employee costs, cash surplus in the company, how much funds are lying idle in the company and what is the borrowing rate used by the companies. All these things, among others, give a better picture about the health of a company and the growth cycle of the company.

We should try to calculate and know the answers to the above questions, in order to understand these companies better. For this, we can read the whole financial statements and the notes to the financial statements. Annual reports of these companies also present the better and larger picture of the health and future prospects of the companies.