BUS 650 Week 6 Responses Needed
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Comparing Financial Ratios Discussion 1 |
Go to MSN Money (Links to an external site.). (http://investing.money.msn.com/investments/key-ratios) and type in a ticker symbol for a company with the first letter of your last name.
Next, complete the following:
1. On the company page that you selected click on the “Analysis” tab. After doing so, scroll down the page until you see the Financial ratios for the company and the industry.
2. There are several categories listed for ratios. Select one “Financial Condition Ratio” and one “Management Efficiency Ratio”.
3. Also on the company page, on the same ribbon that you found the “Analysis” tab you will find the “Related” tab. Click on it and select a competitive company within that industry and compare those ratios to the ones you just found.
Examine your findings and determine whether your company outperforms its competition based on financial ratios. Identify where your firm seems to lag. Describe how your firm compares with the industry and speculate as to why you believe your firm is performing as it is.
Guided Response: Review the financial ratios provided by your classmates. Do any seem unusual? Respond to two classmates by sharing any reasons you can provide to explain the variance in the ratios. Support your reasons with evidence.
Respond to Christina Gebhart post
Companies use financial ratios to express their stability, liquidity and their efficiency to potential investors that will help them make investing decisions. These ratios can be viewed and compared to multiple companies including their competitors to see where they might lack and where they are succeeding.
Genpact is a company that provides digital technology services. After reviewing their financial health, the debt equity ratio for the company is 0.61, while the industry is 0.91. The debt equity ratio represents the leverage of equity to debt, meaning that the company’s total debt is 61% of their total equity. There competitors, Cognizant Technology’s debt to equity ratio is 0.07 companywide, with 0.43 for the industry.
Genpact management effectiveness return on equity 5-year average for the company is 20.88, and for the industry 12.22. Compared to their competitor, Cognizant Technology Solutions Corporations with 19.33 for the company, and 16.57 for the industry.
Based on the ratios for both companies, Genpact has a higher debt equity ratio compared to their competitor, and only a slightly higher return on equity percent for the company but not the industry. With such low debt equity ratio for Cognizant while maintaining a high return on equity, shows that they are ahead of Genpact because they offer a larger variety of services that is more appealing to their customers.
References
Byrd, J. H. (2013). Managerial Finance. San Diego, CA: Bridgepoint Education .
Microsoft News. (2020, February 6). MSN Money. Retrieved February 6, 2020, from Genpact Limited: https://www.msn.com/en-us/money/stockdetails/analysis/nys-g/fi-a1tlpr
Respond to Bethany Moorman post
Chewy Inc. (CHWY) has a current ratio of 0.56 and its quick ratio is .28. There were no related companies available to compare to Chewy (PetCo is not public), but the industry current and quick ratios were 1.12 and .72 respectively. Chewy’s debt/equity ratio is -1,000 against the industry debt/equity ratio of .73.
The debt-to-equity ratio shows the proportion of equity and debt a company is using to finance its assets and the extent to which shareholder’s equity can fulfill obligation to creditors in the event of a business decline. A low debt-to-equity ratio indicates a lower amount of financing by debt via lenders versus funding through equity via shareholders. A higher ratio indicates the company is getting more of their financing borrowing which may pose a risk to the company if debt levels are too high.
Chewy Inc seems to be lagging in all respects. I would guess it is because it is a recent acquisition by PetSmart who took Chewy public just last year. The transition caused PetSmart’s debts to rise which could have an effect on Chewy. Chewy is paving the way in selling pet supplies to pet owners online with customized recommendations and fast shipping. The company has experienced some growing pains and transitional glitches after going public.
Reference
Byrd, J., Hickman, K., & McPherson, M. (2013). Managerial Finance [Electronic version]. Retrieved from https://content.ashford.edu/ (Links to an external site.)
https://www.msn.com/en-us/money/stockdetails/analysis/nys-chwy/fi-bqef52
DISCUSSION 2
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Potential Issues in Ratio Analysis |
As your text describes, ratio analysis is a common technique in financial analysis. One of your colleagues states that a thorough ratio analysis is all that is needed in considering the financial health of a company. Although you agree that ratio analysis is a helpful guide, there may be some potential pitfalls in ratio analysis.
Discuss at least three potential issues in utilizing ratio analysis that you would share with your colleague. In addition, calculate a liquidity, profitability, and efficiency ratio from your Week Six company to demonstrate your observations.
Guided Response: Review several of your classmate’s postings. Respond to two of your classmates by commenting on any potential issues in using ratio analysis that were new to you. You may also provide another issue that your classmate had not considered.
Respond to Stephanie Martin post
Although ratio analysis is useful to analyze financial statement data, it does have its limitations. First, ratio analysis is a very valuable tool when used as a comparison. However, the comparison is only of use if the companies are similar. Companies of different sizes or companies with some similarities but also include diverse products do not provide as useful of comparisons. Second, if there are changes in a firm’s accounting policies, this also skews the ratio similarities. Lastly, ratio analysis ignores price level changes caused by inflation (Topper, n.d.). If sales dollars show an increase, but it is only due to inflationary increases, this will not be reflected in the results.
Some examples of ratio analysis for Deere & Co are: 1) the current ratio, 2) return on assets (ROA), and 3) asset turnover ratio.
Current ratio = current assets/ current liabilities = 17,176,000,000/24,903,000,000= .69
ROA = net income/ total assets = 3,200,390,936/ 71,559,500,000 = 4.47
Asset Turnover = revenue/ total assets = 38,623,099,730/ 71,559,500,000 = .539
Although these numbers show how much of the numerator compares to the denominator, we do not know if the numbers are good or not without comparing them to other results. A result for one type of industry may not have the same impact as the same result in another industry, or for a larger firm. Also, we do not know the details surrounding these figures, or what factors may need to be corrected for poor results. As Byrd, Hickman, and McPherson note, this information helps lead the analyst towards the concerns that may help to explain performance (2013).
Toppr.com. (n.d.) Accounting Ratios. Meaning, Objectives, Advantages and Limitations of Ratio Analysis. Retrieved from https://www.toppr.com/guides/accountancy/accounting-ratios/meaning-objectives-advantages-and-limitations-of-ratio-analysis/
Byrd, J., Hickman, K., & McPherson, M. (2013). Managerial Finance [Electronic version]. Retrieved from https://content.ashford.edu/
Respond to Jazmine Weatherholtz post
When making a managerial decision a useful financial tool to use is the ratio analysis, but there are other types of data to look at as well. By only looking at the ratio analysis there may be a misunderstanding about the organization, and you wouldn’t be able to see the company’s bigger picture. If only using the ratio analysis there are a lot of negatives to it. The information is not fully displayed. It might show a certain time of the organization but not the full history. With that being said you couldn’t really estimate the future accurately. Another issue is the inventory approaches and accounting principles the company may have in place may not be there if the ratio analysis is the only approach. Ratio analysis isn’t a bad option to use it just has a few issues that managers must understand when using it. It should not be the only approach used.
Byrd, J., Hickman, K., & McPherson, M. (2013). Managerial Finance [Electronic version]. Retrieved from https://content.ashford.edu/