Question

a. What kind of ratios to find from the consolidated statement of operations and consolidated balance sheet of a particular industry for: understanding the financial performance, as well as near-term future for a company. b. Using consolidated statement of operations and consolidated balance sheet as well as that of competitors what ratio tools do we need to analyse their performance. Moreovers what ratio and other tools do we use for making comparison except common size and comparitive statement.

Answer 1

For near term future analysis of a company, the ratios used are

a) Current Ratio = Current Assets/Current Liabilities
The current ratio helps to analyze whether the company has sufficient current assets to pay of the liabilities. Current assets and liabilities have a maturity of less than a year. Higher the ratio, the company will be able to fulfill it's future short term liabilities

b) Net Profit Margin = Net Profit / Total Sales
This ratio helps to analyze the amount of net profit a company makes for every dollar of sales done.

c) Return of Assets = Net Income / Total Assets
This ratio helps in analyzing how much percentage of profit does a company make while utilizing its resources

d) Asset Turnover = Sales / Total Assets
This ratio helps in analyzing how efficiently the company uses its assets in the form of sales

e) Cash Flow from Operations to Debt Ratio = Cash Flow from Operations / Total Debt
This ratio determines the coverage ratio for the amount of debt the company has. If CFO is higher than debt then the company will be able to pay off its liabilities.

f) Return on Equity = Net Income / Shareholder's Equity
This ratio analyzes the amount of profit or returns the company makes on the shareholder's capital. If the return on equity is higher than the cost of capital then it will be beneficial for the company as well as shareholders

Ratios used for competitor Analysis are

a) Liquidity Ratio
i) Current Ratio = Current Assets/Current Liabilities
The current ratio helps to analyze whether the company has sufficient current assets to pay of the liabilities. Current assets and liabilities have a maturity of less than a year. Higher the ratio, the company will be able to fulfill it's future short term liabilities

ii) Quick Ratio = (Current Assets - Inventories) / Current Liabilities
It helps to analyze whether the company has enough of its most liquid assets (cash and marketable securities, accounts receivables) in order to cover its short term obligations

iii) Cash Conversion Cycle = Days Sales Outstanding + Days Inventory Outstandanding - Days Payables Outstanding
Lower the cash conversion cycle, the better it is for the company. So that it won't have to invest a lot of cash for its working capital management.

b) Profitability Ratio
i) Operating Income Margin = Operating Income / Total Sales
It helps to analyze how much profit a company makes from its main, ongoing operations. The higher the margin, the better it is.

ii) Net Profit Margin = Net Profit / Total Sales
This ratio helps to analyze the amount of net profit a company makes for every dollar of sales done.

c) Financial Leverage
i) Debt Ratio = Total Debt / Total Assets
Debt ratio help to analyze how much of the assets is funded by debt. Lower the debt ratio, lower is the chances of the company defaulting

ii) Debt To Equity Ratio = Total Debt/Total Equity
This helps in analyzing the capital structure of the company. Higher the ratio, higher the chances of default

iii) Interest Coverage Ratio = EBIT/Total Interest Expense
It is used to determine how easily a company can pay off its interest expense in a given year. Higher the ratio, the better it is