# Financial Performance

Essay by   •  March 9, 2011  •  1,569 Words (7 Pages)  •  1,610 Views

## Essay Preview: Financial Performance

Report this essay
Page 1 of 7

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 firm's 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 firm's 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 company's 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 company's cash and short-term investments to the financial liabilities the company is expected to incur within a year's 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 company's 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 company's 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 company's 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 entity's total liabilities divided by shareholders' equity. The two components are often taken from the firm's balance sheet (or statement of financial position), but they might also be calculated using their market values if both the company's debt and equity are publicly traded. It is used to calculate a company's "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 company's assets are in generating revenue. This number tells you "what the company can do with what it's got", ie how many dollars of profits they can achieve for each dollar of assets they control. It's 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 return on assets, since they have to spend such assets to do business. (And if they have to pay a lot to maintain these assets, that will decrease the ROA even more, since the maintenance costs will decrease their earnings). Shoestring operations (software companies, job placement firms) will have a high ROA: their required assets are minimal.

When to use it:

Return on assets is an indicator of how profitable a company is. Use this ratio annually to compare your business' performance to your industry's norms.

Return on common equity (ROE, Return on average common equity) - earnings before extraordinary items, less preferred-share dividends, divided by average common shareholders' equity. The ROE shows the rate of return on the investment for the company's common shareholders, the only providers of capital who do not have a fixed return. ROE can be seen as a measure of how well a company used reinvested earnings to generate additional earnings, equal to a fiscal year's after-tax income (after preferred stock dividends but before common stock dividends) divided by total equity, expressed as a percentage.

In finance, the price earnings ratio (P/E ratio) of a stock (also called its "earnings multiple", or simply "multiple" or "PE") is used to measure how cheap or expensive share prices are. It is probably the single most consistent red flag to excessive optimism and over-investment. It also serves, regularly, as a marker of business problems and opportunities. By relating price and earnings per share for a company, one can analyze

...

...