Question

Financial ratios are essential to provide an accurate valuation of a firm. Select a publicly traded firm of your choice. 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

Let we take the example of Kodak: report of 2019:

1) Performance:

To measure the performance of the company various ratios like Profit margin, Return on Assets, Returns on Equity, Earning per share etc are used.

We will take return on equity as a ratio to analyze:

ROE= Profit after tax/Shareholders equity

= 116/99

=1.17

This ratio connects income statement and Balance sheet , here it gives idea of firms capability to turn its investments into profit.

2) Activity:

>> It is useful to determine compan's efficiency to use its assets to operate its business and get return.

Here we will take Assets turnover ratio

Assets Trunover Ratio= Sales/ Average Total Assets, here average assets (1415+1510)/2= 1462.5

= 1242/1462.5

= 0.85

>> Here it gives an idea of howmany times assets are turned in period to generate sales. Here it is less than 1 so firm is not utilising assets properly.

3) Financing:

Here we will take Debt to Equity ratio, it will give idea of firm's source of financing.

DE= (109+ 231+2)/281

= 342/281

= 1.22

>> Here firm is having more debt as finance source.

4) Liquidity:

Here we will take into consideration through Quick ratio

Quick ratio= Quick Assets/ Current Liabilities

= 491/ 368

= 1.33

>> Here company have sufficient liquidity to pay all its current liabilities.