Loading...

Messages

Proposals

Stuck in your homework and missing deadline? Get urgent help in $10/Page with 24 hours deadline

Get Urgent Writing Help In Your Essays, Assignments, Homeworks, Dissertation, Thesis Or Coursework & Achieve A+ Grades.

Privacy Guaranteed - 100% Plagiarism Free Writing - Free Turnitin Report - Professional And Experienced Writers - 24/7 Online Support

Lamar swimwear comprehensive problem

05/01/2021 Client: saad24vbs Deadline: 10 Days

3


Financial Analysis


LEARNING OBJECTIVES


LO 3-1


Ratio analysis provides a meaningful comparison of a company to its industry.


LO 3-2


Ratios can be used to measure profitability, asset utilization, liquidity, and debt utilization.


LO 3-3


The Du Pont system of analysis identifies the true sources of return on assets and return to stockholders.


LO 3-4


Trend analysis shows company performance over time.


LO 3-5


Reported income must be further evaluated to identify sources of distortion.


If you’re in the market for dental products, look no further than Colgate-Palmolive. The firm has it all: every type of toothpaste you can imagine (tartar control, cavity protection, whitening enhancement), as well as every shape and size of toothbrush. While you’re getting ready for the day, also consider its soaps, shampoos, and deodorants (Speed Stick, Lady Speed Stick, etc.).


For those of you who decide to stay home and clean your apartment or dorm room, Colgate-Palmolive will provide you with Ajax, Fab, and a long list of other cleaning products.


All this is somewhat interesting, but why mention these subjects in a finance text? Well, Colgate-Palmolive has had some interesting profit numbers over the last three years. Its profit margin in 2014 was 13.5 percent, and its return on assets was 31.5 percent. While these numbers are higher than those of the average company, the 2014 number that blows analysts away is its return on stockholders’ equity of 167.8 percent (the norm is 15–20 percent). In fact, this ROE is so high and unrealistic that some financial services list the number as not meaningful (NMF). The major reason for this abnormally high return is its high debt-to-total-asset ratio of 81 percent. This means that the firm’s debt represents 81 percent of total assets and stockholders’ equity only 19 percent. Almost any amount of profit will appear high in regard to the low value of stockholders’ equity.


In contrast, its main competitor, Procter & Gamble, has only a 17.5 percent return on stockholders’ equity, partially because it is heavily financed by stockholders’ equity at 66.2 percent while its debt-to-asset ratio is 33.8 percent. This may be good or bad. This kind of analysis will be found in the financial ratios discussion in this chapter.


In Chapter 2, we examined the basic assumptions of accounting and the various components that make up the financial statements of the firm. We now use this fundamental material as a springboard into financial analysis—to evaluate the financial performance of the firm.


The format for the chapter is twofold. In the first part we use financial ratios to evaluate the relative success of the firm. Various measures such as net income to sales and current assets to current liabilities will be computed for a hypothetical company and examined in light of industry norms and past trends.


Page 57


In the second part of the chapter we explore the impact of inflation and disinflation on financial operations. You will begin to appreciate the impact of rising prices (or at times, declining prices) on the various financial ratios. The chapter concludes with a discussion of how other factors—in addition to price changes—may distort the financial statements of the firm. Terms such as net income to sales, return on investment, and inventory turnover take on much greater meaning when they are evaluated through the eyes of a financial manager who does more than merely pick out the top or bottom line of an income statement. The examples in the chapter are designed from the viewpoint of a financial manager (with only minor attention to accounting theory).


Ratio Analysis


Ratios are used in much of our daily life. We buy cars based on miles per gallon; we evaluate baseball players by earned run and batting averages, basketball players by field goal and foul-shooting percentages, and so on. These are all ratios constructed to judge comparative performance. Financial ratios serve a similar purpose, but you must know what is being measured to construct a ratio and to understand the significance of the resultant number.


Financial ratios are used to weigh and evaluate the operating performance of the firm. While an absolute value such as earnings of $50,000 or accounts receivable of $100,000 may appear satisfactory, its acceptability can be measured only in relation to other values. For this reason, financial managers emphasize ratio analysis.


For example, are earnings of $50,000 actually good? If we earned $50,000 on $500,000 of sales (10 percent “profit margin” ratio), that might be quite satisfactory—whereas earnings of $50,000 on $5,000,000 could be disappointing (a meager 1 percent return). After we have computed the appropriate ratio, we must compare our results to those achieved by similar firms in our industry, as well as to our own performance record. Even then, this “number-crunching” process is not fully adequate, and we are forced to supplement our financial findings with an evaluation of company management, physical facilities, corporate governance, sustainability, and numerous other factors.


Many libraries and universities subscribe to financial services such as Bloomberg, Standard & Poor’s Industry Surveys and Corporate Reports, the Value Line Investment Survey, Factset, and Moody’s Corporation. Standard & Poor’s also leases a computer database called S&P IQ to banks, corporations, investment organizations, and universities. Compustat contains financial statement data on over 16,000 companies for a 20-year period. Ratios can also be found on such websites as finance.yahoo.com. These data can be used for countless ratios to measure corporate performance. The ratios used in this text are a sample of the major ratio categories used in business, but other classification systems can also be constructed.


Classification System


We will separate 13 significant ratios into four primary categories.


A. Profitability ratios


  1. Profit margin


  2. Return on assets (investment)


  3. Return on equity


Page 58


B. Asset utilization ratios


  4. Receivable turnover


  5. Average collection period


  6. Inventory turnover


  7. Fixed asset turnover


  8. Total asset turnover


C. Liquidity ratios


  9. Current ratio


10. Quick ratio


D. Debt utilization ratios


11. Debt to total assets


12. Times interest earned


13. Fixed charge coverage


The first grouping, the profitability ratios, allows us to measure the ability of the firm to earn an adequate return on sales, total assets, and invested capital. Many of the problems related to profitability can be explained, in whole or in part, by the firm’s ability to effectively employ its resources. Thus the next category is asset utilization ratios. Under this heading, we measure the speed at which the firm is turning over accounts receivable, inventory, and longer-term assets. In other words, asset utilization ratios measure how many times per year a company sells its inventory or collects all of its accounts receivable. For long-term assets, the utilization ratio tells us how productive the fixed assets are in terms of generating sales.


In category C, the liquidity ratios, the primary emphasis moves to the firm’s ability to pay off short-term obligations as they come due. In category D, debt utilization ratios, the overall debt position of the firm is evaluated in light of its asset base and earning power.


The users of financial statements will attach different degrees of importance to the four categories of ratios. To the potential investor or security analyst, the critical consideration is profitability, with secondary consideration given to such matters as liquidity and debt utilization. For the banker or trade creditor, the emphasis shifts to the firm’s current ability to meet debt obligations. The bondholder, in turn, may be primarily influenced by debt to total assets—while also eyeing the profitability of the firm in terms of its ability to cover debt obligations. Of course, the experienced analyst looks at all the ratios, but with different degrees of attention.


Ratios are also important to people in the various functional areas of a business. The marketing manager, the head of production, the human resource manager, and many of their colleagues must all be familiar with ratio analysis. For example, the marketing manager must keep a close eye on inventory turnover; the production manager must evaluate the return on assets; and the human resource manager must look at the effect of “fringe benefits” expenditures on the return on sales.

Homework is Completed By:

Writer Writer Name Amount Client Comments & Rating
Instant Homework Helper

ONLINE

Instant Homework Helper

$36

She helped me in last minute in a very reasonable price. She is a lifesaver, I got A+ grade in my homework, I will surely hire her again for my next assignments, Thumbs Up!

Order & Get This Solution Within 3 Hours in $25/Page

Custom Original Solution And Get A+ Grades

  • 100% Plagiarism Free
  • Proper APA/MLA/Harvard Referencing
  • Delivery in 3 Hours After Placing Order
  • Free Turnitin Report
  • Unlimited Revisions
  • Privacy Guaranteed

Order & Get This Solution Within 6 Hours in $20/Page

Custom Original Solution And Get A+ Grades

  • 100% Plagiarism Free
  • Proper APA/MLA/Harvard Referencing
  • Delivery in 6 Hours After Placing Order
  • Free Turnitin Report
  • Unlimited Revisions
  • Privacy Guaranteed

Order & Get This Solution Within 12 Hours in $15/Page

Custom Original Solution And Get A+ Grades

  • 100% Plagiarism Free
  • Proper APA/MLA/Harvard Referencing
  • Delivery in 12 Hours After Placing Order
  • Free Turnitin Report
  • Unlimited Revisions
  • Privacy Guaranteed

6 writers have sent their proposals to do this homework:

Top Essay Tutor
Helping Hand
University Coursework Help
Writer Writer Name Offer Chat
Top Essay Tutor

ONLINE

Top Essay Tutor

I have more than 12 years of experience in managing online classes, exams, and quizzes on different websites like; Connect, McGraw-Hill, and Blackboard. I always provide a guarantee to my clients for their grades.

$105 Chat With Writer
Helping Hand

ONLINE

Helping Hand

I am an Academic writer with 10 years of experience. As an Academic writer, my aim is to generate unique content without Plagiarism as per the client’s requirements.

$100 Chat With Writer
University Coursework Help

ONLINE

University Coursework Help

Hi dear, I am ready to do your homework in a reasonable price.

$102 Chat With Writer

Let our expert academic writers to help you in achieving a+ grades in your homework, assignment, quiz or exam.

Similar Homework Questions

Business process risk assessment - Ikea vrio framework - Southern sporting goods company makes basketballs and footballs - Calculating drops per minute - Difference between bcp and drp pdf - Rooftop evaporative cooler installation - Https writingcenter unc edu tips and tools literature reviews - Mental health nursing process recording example - Application for admission of securities to the official list - Case study 1 crj325 - Professional Development Resources - Health promotion in nursing practice 8th edition - Range rule of thumb in statistics - Who stole the cookie from the cookie jar barney - Csi wildlife worksheet answer key - How many strings of eight uppercase english letters are there - "Testing Procedure" - Knowledge matters promotion with traditional media sim answers - Final Project - Portfolio - Gcse writing to persuade - Circle of control worksheet - Finance Unit 9 - Lab charles law datasheet answers - Middle school math with pizzazz book e answer key e10 - We shall remain after the mayflower worksheet answers - Excessive piston ring groove width - ¿de quién es? answer each question affirmatively using the correct possessive adjective. - Teddy pitsillides cause of death - Chow chow dog for sale melbourne - Essay - Africa in world history gilbert 3rd edition chapter summaries - Network security firewalls and vpns second edition pdf - Journal 5 - Things fall apart synopsis - Military Trends Revise _ Graduate Paper - Why is the yellow flame called the safety flame - Eastern sherbrooke forest walk - Aldridge & district dog training club - Homework for lab 10 two dimensional motion answers - Directions to rice university - LEADERSHIP AND CREATIVE SOLUTIONS - What is the ktea 3 - The pardoner's tale questions answer key - Child observation paper for child development - Lab Discussion - Marketing management - Cash book in excel - HA535 Unit 9 Assigment - DQ: The Socrates and the Quest of the moral Truth - Minimum 6 Paragraph for Intranet in your organization. - Which mission statement best represents the digby company? - Recessed data wall box - Assessment of Performance variances - Lockhttps://www.homeworkmarket.com/sites/default/files/qx/14/12/26/10/bioquiz.docx - Aud to usd commbank - Never shake thy gory locks at me technique - Dbms_lob read example in oracle - Cat 6 crimping color code - Week 13 - Ethical dilemma in psychology case study - Components to building an effective and successful csirt team - Dulux tranquil retreat colour schemes - Evaluating Organizational Change Write the paper in 8–10 pages, using APA format. - Deriving value from social commerce networks - Salary inequities at astrazeneca - Ward 2c prince charles hospital - The crusades the crescent and the cross answers - Combined gas law problems worksheet - Relative formula mass of butane - Java program calculate change cashier - Macroeconomic - 5 dialogues plato pdf - Module 01 Written Assignment - Managed Care Myths - Lagrange error bound proof - 82 wedgetail circuit narangba qld - Who wrote the nicene creed - Jeremy's a handbag manufacturer in lower manhattan - Benchmark - Science/Health Mini-Unit Plan - Business Policy - Swinburne online teaching periods 2021 - 560 paper - A pn junction allows current to flow when - Nursing informatics - Cannon and washburn 1912 - Kellogg's executive summary - Metal activity and reactivity oxidation and reduction reactions lab answers - Combat fire inc manufactures steel cylinders and nozzles - Wabco code sid 14 fmi 4 - Module 2 Activity & Discussion - What is the heinz dilemma - The three subfields of the classical perspective include - Charity organization society today - TIMEMAPPER ENTRY 4 (ENCYCLOPEDIA STYLE) CAREFULLY READ ATTACHED DOC. - Ethnosemantics - Pestalozzi philosophy of education pdf - Periodization training for sports ppt - The transition handbook pdf - Rock paper scissors lizard spock java program code - Why does pentane have a higher boiling point than 2-methylbutane