Question

Pick two publicly traded companies in the same industry and perform ratio analysis on each of the companies for two years. Which company you would purchase stock as an investment for yourself and why using the financial ratios helped in the analysis. Currently reviewing Apple and IBM, struggling with some of the ratio analysis.

Answer 1

Ratio Analysis :

The Financial Analysis of a company using the Financial ratios and comparing its trends and measuring its performance within the company and the companies of the industry is known as ratio analysis.

Ratios are the metrics used to evaluate the capability, profitability, and overall performance of the company.

Currently reviewing Apple and IBM, struggling with some of the ratio analysis.

Current Ratio Analysis

Company	Cash and Investments	Debt	Cash From Operations	Current Ratio
Apple	$237.5 billion	$87.0 billion	$65.8 billion	1.3
IBM	$15.0 billion	$42.4 billion	$18.5 billion	1.2

Since the Current Ratio of Apple is more than current ratio of IBM, so Apple is better.

Winner : Apple

Company	P/E Ratio	Forward P/E Ratio	EV/EBITDA
Apple	14.3	11.8	9.2
IBM	13.7	12.1	11.1

In terms of the overall attractiveness of their valuations, though, Apple wins this category as well.

P/E Ratio = Price of stock per share/ Earnings per share (EPS)

1. Cash Flow to Debt Ratio

This ratio shows what part of total debt a firm can cover through its annual cash flow earnings.

Cash Flow to Debt Ratio = Operating Cash Flow/ Total Debt

IBM's cash flow to debt ratio: $16.9 billion/ $40.8 billion =0.41. This means that IBM would need 2.5 years cash flow to fulfill its debt obligations. Cash rich Apple on the other maintains lower debt obligations hence its ratio is: $70.76 billion/ $36.4= 1.94. This shows that it can cover its debt obligations in less than a year's cash flow. (For more details on Apple valuation, watch our Apple stock analysis)

Other ratios like Debt ratio and Capitalization ratio are also looked at to find if the company is not overly leveraged and can meet its payment obligations.

1. Quick Ratio

Although current ratio is a good reference point on how a firm manages its short term obligations and payments, the quick ratio provides a better picture by discounting inventory and other current assets. These are removed in the calculations as they are not easily converted into cash.
Quick Ratio= (Cash & Equivalents + Short term investments + Accounts Receivables)/ Current Liabilities

IBM’s Quick Ratio= $40.31 billion/ $39.6 billion =1.018

Thus, Winner is Apple for better ratios.

The Bottom Line

Besides these financial ratios there are others also which are useful in ratio analysis which measure other parameters like Profitability, Operating performance, Cash Flow and more. They are an integral part of financial analysis and a must for every discerning investor.