Question

How will an analyst assess the financial strength of a company using ratios? Give an example of a publicly-traded company and assess three to five financial ratios.

Answer 1

Answer: An analyst analyse the financial strength of the company using financial ratios. Financial ratio are the indicator of profitability, liquidity, efficiency and financial position of a company. Ratios are the barometer of financial health of the company. With the help of financial ratios, investors take investment decision, creditor provide loan to the company and management takes capital structure and financing decisions.

I am taking Apple Inc. It is a publicly traded company. I am taking some ratios of Apple Inc. for the year end Sep. 2018.

Name of the ratio	Meaning	Formula	Ratio	Comments
Current Ratio	This ratio is liquidity measure. Higher the ratio is good but it should be below 2.	Current assets/Current liabilities	1.12	Current ratio is above 1 that indicates company's liquidity position is good.
Net profit margin	This is profitability measure. Higher the ratio is good.	Net profit/Sales	22.41%	Company's net profit is good. Company is profitable.
Return on equity	This is also profitability measure. Higher the ratio is good.	Net profit/Shareholder's equity	55.56%	Companies ROE is higher, shareholders get higher return on their capital.
Total Assets turnover	This is long term activity ratio. Higher the ratio is good.	Net Sales/Average total assets	.73	This ratio indicates that company's assets are efficient enough to generate the sales.
Debt to equity	This is solvency ratio. Lower the ratio is good.	Total liabilities/Total Equity	1.07	It is little higher, higher debt to equity is not good for company. Idea D/E ratio is .40.
Interest coverage	This indicates company's ability to honor its debt. Higher the ratio is good.	EBIT/Interest expense	23.50	This ratio indicates that company can easily and quickly pay its interest expenses on debt.