Question

Use the Internet to research an annual report of a retail company.

Then, imagine you are an investor or creditor; suggest the ratios that you believe would provide an investor or creditor with the most important information needed to make accurate predictions about the company’s financial condition.

When analyzing a company, is it more important to compare the ratios to competitors or to the company’s previous history?

Provide a rationale for your response.

Note: Students using the online discussion thread must provide a link or instructions to the researched report

Answer 1

(1) Suggest the ratios that you believe would provide an investor or creditor with the most important information needed to make accurate predictions about the company’s financial condition.

Solution: The relevance of ratios varies from stakeholder to stakeholder like in case of creditors long-term solvency ratios are more relevant because creditors are more concerned about financial risk which is determined with respective ratios and in case of investor the marketability ratios are more important because they are more concerned with good returns.

Example: Here, we are taking the example of one of the biggest retail chain i.e. Walmart company.

(a) In case of creditors, ratios like interest coverage ratio and financial leverage are more relevant.

* Interest coverage ratios tell the company able to pay interest. The company's ability to pay interest has decreased from 9.66 times to 8.49 times. Still, the company has 8.49 times earnings to pay interest on the debt which is good.

* Financial leverage explains the proportion of debt in the capital structure of the company. The financial leverage has increased from 2.56 to 2.75 but the company has enough earnings to bear financial risk.

(b) In case of investors, the ratios like return on equity, and asset turnover etc.

* The return on equity explains the amount of return for equity shareholders which is decreased slightly from 18.15 to 17.23 but still it is healthy for equity shareholders

* Return on assets explains the asset's productivity of the performance appraisal for right investments in assets on the basis of return. The asset turnover is increased from 2.39 to 2.44 which is good.

Note: The comparison of increase and decrease is made on the basis of financial years 2016-17 and 2017-18.

Q2: When analyzing a company, is it more important to compare the ratios to competitors or to the company’s previous history?

Solution: Both are important and both have their own relevance.

Intracompany ratio comparison refers to company's own comparison of ratios with previous year which tells the overall operational efficiency and effectiveness of the company. Whether the company is organically growing internally or not. If the company is growing internally at a good pace then there is need to make intercompany ratio comparison i.e. comparison with other companies. In other words, in the same industry whether the company is providing good competition to others or not.