Analyze in 1,050 words why each ratio is important for financial decision making.
Select a Fortune 500 company from one of the following industries:
· Pharmaceutical
· Energy
· Retail
· Automotive
· Computer Hardware
Review the balance sheet and income statement in the company’s 2015 Annual Report.
Calculate the following ratios using Microsoft Excel:
· Current Ratio
· Quick Ratio
· Debt Equity Ratio
· Inventory Turnover Ratio
· Receivables Turnover Ratio
· Total Assets Turnover Ratio
· Profit Margin (Net Margin) Ratio
· Return on Assets Ratio
Analyze in 1,050 words why each ratio is important for financial decision making.
Running Head: Financial Ratios, General Motors
Financial Ratios, General Motors
Current Ratio
The current ratio normally refers to a company ability to pay its short term obligations within a year. This mainly describes the liquidity ratio which means the ability of a company to pay back its short term debts or rather liabilities within a year using the company’s assets (Kenton, 2003). These enables the investors to make wise decisions when investing in companies by being provided with some knowledge of the debt burden the company currently has which also reflects on its ability to pay off their various revenues in terms of annual returns on investments. A higher current ratio for example 5 would mean that a company has 5 times more assets over the liabilities. .- what does your computed ratio tell us about company’s liquidity strength or weakness? Year-to-year trend not referenced.
Quick Ratio
Quick ratio refers to a form of liquidity ratio which mainly describes the ability of the company to repay its current liabilities by the use of its quick assets only which means assets that can easily be converted into cash within a period of 90 days or within a very short time. This enables the company make effective decisions when considering selling the company’s long assets to repay its current liabilities. Higher quick ratios are usually more desirable for investors which enables make them make more effective decisions too. In the case of General motors, the company has a very low ratio meaning that they have to sell their long term assets to make up for any current liabilities that needs to be dealt with. –observation is based on what? Need to reference your computed ratio in support of your conclusion as well as the year-to-year trending.
Debt Equity Ratio
The debt ratio mainly describes the ability of a company to maintain its operations without running into solvency which is normally done by comparing the company’s assets against the liabilities, thus reflecting the company’s ability to repay its debts using the assets meaning it normally reflects the debt burden of the company.(run-on sentence) This enables the investors to reach more conclusive decisions as to whether to give a company a loan or not by looking at the debt burden of the company. This also enables a company to make decisions on the sources of capital available to them and the most viable ones for example opting for equity instead of the borrowing of loans from creditors. .- what does your computed ratio tell us about company’s solvency strength or weakness? Year-to-year trend not referenced
Inventory Turnover Ratio
This type of a ratio quantifies the company’s ability to collect its various receivables from the clients. In return this reflects on the effectiveness of the credit management the company provides its clients (Kenton and Murphy, 2003). This shows the type of customers the company has which impacts on the decision of the investors since they can be sure to receive their various equities and benefits in time without derail from unpaid short term debts. The efficiency of the credit management of a company tends to increase the interest of the investors in the company.-incorrect definition- how many times a company sales its inventory and thus recovery its cash from the inventory investment.
Receivables Turnover Ratio
The receivables turnover ratio determines the company’s effectiveness in the collection of the various receivables owed by various clients the company has been dealing with (Kenton and Murphy, 2003). This however provides the company with an insight of how the company manages credit which is usually closely related with how the customers are retained in the company. This facilitates the company’s management with proper platform to determine how they handle the policies so as to effectively manage their receivables turnover ratio while at the same time retaining the clients like reducing the strictness of those policies regulating receivables to maintain quality clients.(run-on sentence –need simplify sentence structure) .- what does your computed ratio tell us about company’s asset management strength or weakness? Year-to-year trend not referenced
Total Assets Turnover Ratio
Total Assets Turnover ratio mainly measures the true measure of a company to generate sales by comparing the net sales against the average the total assets. This provides an overview of the effectiveness of the company to use its assets in revenue generation which in a big way reflects the effectiveness of the, management and the production process which enables the company make decisions in terms of the desired change to increase productivity.-simplify sentence structure. This is however done by comparison to other related companies as a baseline for the measurement of the effectiveness of the use of the various assets. This differentiates from the return on asset ratio by including all of the assets in the formulation of the ratio. .- what does your computed ratio tell us about company’s asset management strength or weakness? Year-to-year trend not referenced
Profit Margin (Net Margin) Ratio
The profit margin is usually used to describe the profitability ratio that mainly shows the profit attained after all the expenses are paid that was used in the initial production process.-company’s ability generated profits from sales. This mainly plays a role in the decision making by investors by providing an overview of the company’s profits and their ability to payback its loans. The total profits made should reflect on the company’s ability to repay the loans accrued during the production process Investors are therefore provided with an insight of the efficiency of the company’s operations. .- what does your computed ratio tell us about company’s profitability generating strength or weakness? Year-to-year trend not referenced
Return on Assets Ratio
The return on assets ratio (ROA) is normally used to calculate the amount of revenue generated by the company’s assets for a certain period of time by simply comparing the total income generated against the overall assets owned by the company. This plays a big role in determining the potential profit that an investment can bring into a company by measuring it against the profit. This plays a very big role in making sure that investors make the right choice before investing in any company which applies in the sense that a higher ROA means that a company makes wise decisions in the application of the various assets at their disposal in the production process, hence the reason why the ratio is normally used as a criterion for measurement of the profits that come with an investment (My Accounting Course[MAC], 2019). The comparison of the various ROA’s by investors normally plays a very big role in the determination of the right choice of investment. However, this is normally limited to the companies that use the same type of assets for example Hardware and machinery in building and construction companies and software and computers for IT companies which normally vary in terms of the cost of those products needed for production. –simplify sentence .- what does your computed ratio tell us about company’s profitability generating strength or weakness? Year-to-year trend not referenced
DuPont analysis requirement for ROA not addressed in your paper in identifying major driver behind ROA performance.
· Your paper is missing conclusion section that recaps the major observations and conclusions of your paper discussion.
· Your paper is missing introduction section telling what you will be discussing
References
My Accounting Course (MAC). (2019). Solvency Ratios. Retrieved from https://www.myaccountingcourse.com/financial-ratios/solvency-ratios
Will Kenton, & Chris B Murphy. (2003, November 25). Why the Receivables Turnover Ratio Matters. Retrieved from https://www.investopedia.com/terms/r/receivableturnoverratio.asp
Will Kenton. (2003, November 19). How the Current Ratio Works as a Liquidity Ratio. Retrieved from https://www.investopedia.com/terms/c/currentratio.asp#formula-and-calculation-for-current-ratio