26 Jun Discussion post 1 Using Ratios To Measure A Company
Discussion post 1
Using Ratios To Measure A Companys Performance
What information does ratio analysis provide for meeting the requirements of the scenario?
Potential investors want to understand how companies make decisions and how they make money. By comparing percentages from one time frame to another, the change either positively or negatively, can affect the decision to invest in a company. Ratios can show trends as well as identify areas that need attention or improvement. These comparisons can also look at a company position in a specific industry to identify leaders and overall trends for a particular market
Which ratios are the most important, and which ones are of limited value? Justify your choices for the scenario.
Capital to assets ratio are used to determine the financial health of a company. While assets include what the company owns, capital relates to the value of a company. Brand strength, number of customers, and percentage of market share all contribute to company value.
Management efficiency ratio measure changes in accounts receivables, operating expenses, inventory process, and how a company uses both long term and short term assets.
Leverage ratio analyzes how much debt a company has. Debt to equity can be significant if a company goes belly up and leaves nothing for stockholders.
Liquidity ratios are important, and significant for investment decisions. In manufacturing, there is a period of research, development and production that leads to sale of goods. A company without cash reserves, or disparities on the balance sheet to meet regular obligations can be easily identified with the calculations for current ratio (current assets/current liabilities), quick ratio (cash + accounts receivable/current liabilities) and cash ratio (cash/current liabilities).
Compnet has not paid dividends to investors and this is definitely a ratio to consider in determining the financial health and strength of a company. Ratios that would be less significant for this scenario would be price earnings and dividend payout ratios.
Why do you need to compare
The current year ratios with the prior year ratios?
Ratios should be compared regularly, such as quarterly, annual or fiscal year end. This can identify trends, efficiencies and weakness of a company.
The ratios of competitors in the same industry or some other benchmark?
Benchmarking is an important tool for management to establish industry standards. It drives completion, innovation and development in operations, production and marketing.
Other than the computations used in ratio analysis, what else is necessary to properly analyze a company for investment?
Financial statements showing cash flow, assets, operating cost and revenues provide the information for ratio comparisons. Investors should consider a companys rank among its industry, management and leadership, supply and demand of product or service
References
Collier, P. M. (2012). Interpreting Financial Statements. In P. M. Collier, Accounting For Managers (pp. 111-151). West Sussex: John Wiley & Sons Ltd.
Shay, R. (1995). Financial ratio analysis: Why? Savings & Community Banker, 4(1), 40. Retrieved from http://search.proquest.com/docview/195160964?accountid=34899
Discussion Post 2
M2_A2 Discussion–Using Ratios to Measure a Companys Performance
Analyzing Compnets financial statements is an important step in the process when deciding whether or not investing would be a sound financial decision. The balance sheet is an useful report of balanced amounts for all the assets, liabilities and equity of Compnet from a certain date forward. The income statement reports all revenue and expenses for a specified period of time. Ratios are a comparison of two numbers with one being expressed as a percentage of the other. When researching a company for investment potential several years should be reviewed to define trend analysis of financial practices. Ratio analysis can be used to interpret performance against five criteria: 1. the rate of profitability 2. liquidity, i.e. cash flow 3. gearing, i.e. the proportion of borrowings to shareholders equity 4. how efficiently assets are utilized and 5. the returns to shareholders (Collier, 2012).
Several different ratios are used to evaluate profitability: return on investments (ROI), return on capital employed (ROCE), operating margin (operating profit/sales), gross margin (gross profit/sales), and sales growth. Businesses and the stock market not only like to see increasing profitability but also increasing sales, which is an important measure of the long-term sustainability of profits (Collier, 2012). Debt to equity ratio, gearing ratio, and quick ratio are the more important ratios when analyzing Compnets financial information. The companys liquidity has a current ratio of 2.5 and a quick ratio of 1.99. Current and quick ratios are used in the financial world to predict an organizations failure chances. Compnets current ratio is greater that 1.5 which indicates that there is enough liquidity to meet its short term obligations. With the current ratio equaling 2.5 this also indicates that assets are not being utilized productively which may have adverse effects on the long term prospects of the companys future. One reason for the high current ratio could be inventory, the quick ratio doesnt include inventory, accounting for one reason it is lower. Current and quick ratios are two parameters that identify a companys liquidity which indicates its financial health. Gearing ratio is the amount of borrowings relative to shareholders equity. The higher the gearing the higher the risk of repaying debt and interest. Most businesses aim for a ge
Our website has a team of professional writers who can help you write any of your homework. They will write your papers from scratch. We also have a team of editors just to make sure all papers are of HIGH QUALITY & PLAGIARISM FREE. To make an Order you only need to click Ask A Question and we will direct you to our Order Page at WriteDemy. Then fill Our Order Form with all your assignment instructions. Select your deadline and pay for your paper. You will get it few hours before your set deadline.
Fill in all the assignment paper details that are required in the order form with the standard information being the page count, deadline, academic level and type of paper. It is advisable to have this information at hand so that you can quickly fill in the necessary information needed in the form for the essay writer to be immediately assigned to your writing project. Make payment for the custom essay order to enable us to assign a suitable writer to your order. Payments are made through Paypal on a secured billing page. Finally, sit back and relax.
About Writedemy
We are a professional paper writing website. If you have searched a question and bumped into our website just know you are in the right place to get help in your coursework. We offer HIGH QUALITY & PLAGIARISM FREE Papers.
How It Works
To make an Order you only need to click on “Order Now” and we will direct you to our Order Page. Fill Our Order Form with all your assignment instructions. Select your deadline and pay for your paper. You will get it few hours before your set deadline.
Are there Discounts?
All new clients are eligible for 20% off in their first Order. Our payment method is safe and secure.