Question

Financial ratios are essential to provide an accurate valuation of a firm. Select a publicly traded firm of your choice. You may use the firm you have elected to profile for the course-long Financial Analysis and Proposal assignment or a completely different organization altogether. Select one ratio each in the areas of (a) performance, (b) activity, (c) financing, and (d) liquidity warnings. Provide an evaluation of the selected firm's strengths and weaknesses. Based on the ratios you selected, how well does your chosen firm perform? Explain.

Answer 1

The company i have chosen is NETFLIX :

ratio analysis : dated 31/12/2017

a)performance ratio:

net income/ total asssets

= 558929/19012742

= 2.94%.

the performance ratio is positive, but it could be higher. right now the compnay seems to be not generating enough income from it's assets.

b)activity ratio :

total asset turnover ratio:

sales/total assets

= $11692713/19012742

=61.50 %.

the activity ratio determines the efficiency with which the firm is utilizing its assets . this ratio, the higher is the better . an activity ratio of 61.50 % is fairly good.

c)financing ratio:

total liabilities /total assets

=$15430786/$19012742

= 0.81

the financing ratio of less than 1 ,is good as there is not too much dependence on external financing.the company is financed by internal assets and the chances of bankruptcy is less.

d)liquidity ratio:

current assets/ current laibilities

= $7669974/$5466312

= 1.4

the firm is not able to pay off the liabilities as when they come due because the current assets are short to pay off current liabilities easily over the long term there can be a liquidity crunch for the company .this is indicated by the very low liquidity ratio of less than 2. , which is harmful for the firm .

the firm is not performing very well. there is a lot of scope for it to be improving upon it's liquidity ratio by investing more on it's current assets , generating a higher net income and improving upon it's activity ratios by uisng the assets more effciently to generate higher sales.