Financial Performance
Essay title: Financial Performance
Financial Performance
Subject: Managerial Finance I
Instructor: Bob
Students: Lawrence C.
Monica E.
Carrington B.
Date: 06/13/2006
The current ratio is a comparison of a firms current assets to its current liabilities. For example, Dell’s Inc. current assets are 16,897. (in millions) and its current liabilities are 14,136, (in millions) then its current ratio would be 16,897. (in millions) divided by 14,136, (in millions), which equals 1.1. This was the fiscal years ending January 28 ,2005
In comparison, Hewlett Packard current assets are 43,334,(in millions), and its current liabilities are 31,460, (in millions) then its current ratio would be 43,334,. (in millions) divided by 31,460, (in millions), which equals 1.1. This was the fiscal years ending October 31, 2005
The current ratio is an indication of a firms market liquidity and ability to meet short-term debt obligations. Acceptable current ratios vary from industry to industry, but a current ratio between 1 and 1.5 is considered standard. If a companys current assets are in this range, then it is generally considered to have good short-term financial strength. If current liabilities exceed current assets (the current ratio is below 1), then the company may have problems meeting its short-term obligations. If the current ratio is too high, then the company may not be efficiently utilizing its current assets.
The Acid-test or quick ratio measures the ability of a company to use its “near cash” or quick assets to immediately extinguish its current liabilities. Quick assets include those current assets that presumably can be quickly converted to cash at close to their book values. Such items are cash, stock investments, and accounts receivable. This ratio implies a liquidation approach and does not recognize the revolving nature of current assets and liabilities.
Compares a companys cash and short-term investments to the financial liabilities the company is expected to incur within a years time.
Ideally the acid test ratio will be 1:1, but 0.8:1 is acceptable, any less and the business could suffer financial difficulties.
Dell’s quick ratio for January 28, 2005 was 1.16. Hewlett Packard’s was
A measure of the number of times a companys inventory is replaced during a given time period. Turnover ratio is calculated as cost of goods sold divided by average inventory during the time period. A high turnover ratio is a sign that the company is producing and selling its goods or services very quickly.
Profit margin is a measure of profitability. It is calculated using a formula and written as a percentage or a number. Profit margin = Net income before tax and interest / Revenue
For example, suppose a company produces bread and sells it for 10 units of currency. It costs the company 6 units of currency to produce the bread and it also had to pay an additional 2 unit of currency in tax. That makes the companys net income 4 units of currency (10 – 6, before tax) and its revenue 10 units of currency. The profit margin would be (4 / 10) or 40%. Profit margin is an indicator of a companys pricing policies and its ability to control costs. Differences in competitive strategy and product mix cause profit margin to vary among different companies.
The debt to equity ratio (D/E) is a financial ratio, which is equal to an entitys total liabilities divided by shareholders equity. The two components are often taken from the firms balance sheet (or statement of financial position), but they might also be calculated using their market values if both the companys debt and equity are publicly traded. It is used to calculate a companys “financial leverage” and indicates what proportion of equity and debt the company is using to finance its assets.
The Return on Assets (ROA) percentage shows how profitable a companys assets are in generating revenue. This number tells you “what the company can do with what its got”, ie how many dollars of profits they can achieve for each dollar of assets they control. Its a useful number for comparing competing companies in the same industry. The number will vary widely across different industries. Capital-intensive industries (like railroads and nuclear power plants) will yield a low