Question

Pick a publicly recognized company.

You are the newly appointed treasurer and your partner is the newly appointed controller of your company. In order to learn more about your company, you have decided to analyze the company’s financial performance over the last 2 years. To do this, you have decided to calculate the following ratios for the company’s 2 most recent years in the noted categories:

Profitability Ratios

Gross Margin Percentage

EBIT Margin Percentage

Resource Management Ratios:

Age of Inventory

Age of Accounts Receivable

Age of Accounts Payable

Liquidity Ratio:

Current Ratio

Leverage Ratios

Debt-to-Assets Ratio

Debt-to-Equity Ratio

Interest Coverage

In addition, you have decided to evaluate the Return on Equity (ROE) of the company by calculating the DuPont Ratio, including the Profit Margin, Asset Turnover, and Financial Leverage Ratios.

Required

As a member of a team, you will produce a 5–7-page paper that will show your calculations of each of these ratios for the company’s 2 most recent years. In addition, you will provide a brief analysis of each of the ratios. You will also provide a brief evaluation regarding the company’s performance as it relates to the four categories listed above, plus the DuPont Equation. Finally, you will discuss how these ratios will help you make appropriate financial decisions as they relate to your role as a financial manager, and also assist in achieving the firm’s financial management goals.

Answer 1

Profitability Ratios: The ability of a company to earn revenue more than its expenses incurred for operations of the company. This will be useful for the investors in decision making.

Gross Margin Percentage: The ability of a company to earn revenue more than its costs of goods sold. (Total revenue - costs of goods sold to produce that revenue/ total revenue *100)

EBIT Margin Percentage: The operating efficiency is concluded here of the company. (Earnings/revenue before interest and tax / Total revenue * 100)

Resource Management Ratios: These ratios will help in calculating efficiency of the products sold, humans who acts a resource to the company are in a proper productive way or not.

Age of Inventory: Number of days a company is to sell its inventory ( Cost of inventory/ Cost of goods sold * 365)

Age of Accounts Receivable: Used for calculating the receivables which are overdue for payment.

Age of Accounts Payable: Used for estimating the company periods of payment to a supplier

Liquidity Ratio: The capacity of the firm to pay off its debts as early as possible (Cash equivalents + short term investments + debtors) / Current liabilities)

Current Ratio: The capacity of the company's current assets to pay off current liabilities (Current assets / Current liabilities)

Leverage Ratios: Helps in calculating the company investment risk whether acquiring an asset pays off the obligation in the long term or not.Ability of a firm to repay debt. (Debt / equity- one of the ratios)

Debt-to-Assets Ratio: Indicates the debt which is financed by the asset. (Debt / Asset)

Debt-to-Equity Ratio: Mentioned in leverage ratio.