Essay

Financial Analysis of a Public Company

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Public companies or any other companies enter into business with an objective of making profits. At the end of every financial or accounting period, the company managers need to prepare and analyze the financial statements so that they can be meaningful to the shareholders. There is need to calculate the financial ratios for comparison and analysis to determine the company’s progress. This essay will discuss the ratios and how to use them in analyzing the progress of a company.

Profitability ratios

It measures how effective the management is generating profits from the assets they own. They include the following.

·         Gross profit margin – it measures how the management is able to set the prices of commodities and at the same time control the production costs. It is given by: sales – COGS/sales

·         Net profit margin - it indicates the value of profits made from selling a unit of product. It is given by: Net income after tax/sales

·         Return on assets – its shows how well a company can use it assets to generate assets. It is given by: Net income after taxes/total assets.

Liquidity ratios

It measures the ability of a company to meet its short term financial obligation. They include the following:

·         Current ratio – measures the ability of a company to meet its short term debts. It is given by: Current assets/current Liabilities

·         Quick ratio –measures the ability of a business to meet its obligations using the most liquid assets. It is given by: Current Assets – Inventory/current liabilities

·         Net working capital ratio – its measures the excess of currents assets over current liabilities. It is given by: Current Assets – Current Liabilities

Debt ratios

These are ratios that show the percentage of company’s assets that are funded by debts. They include:

·         Debt ratios – it is a ratio of total debts and the totals of assets. It given by: Total debts/ Total assets

·         Debt Equity Ratios –it measures the financial leverage of a company. Calculated by: Total debts/ shareholders’ Equity

Conclusion and Recommendation

The financial statements used to illustrate the financial has been extracted from the annual reports of Dell Company (Mardini, 2015). The computations have been calculated in spread sheet and imported into word to show the calculations and evaluations of three categories of financial ratios. The company both capital and asset base is very good. For instance, the return on asset ratio is $0.05 which means that for every one dollar invested into the fixed assets the company gets a net value or return of $0.05.  The net profit margin has decreed from $0.06 in 2012 to $0.04 in 2013. However, it does not mean the company has made loses. It only means that, for every one dollar in sales there is a return of $ 0.06 in 2012 and $0.04 in 2013.

Based on the liquidity ratios, we can conclude that the company can easily meet its short term obligations. For instance, a quick ratio of $1.13 in 2013 mean that the company has the ability to replenish stock and service its short term obligations. The working capital shows how much more that the company has in terms of currents assets compared to current liabilities. The working capital improved from $1438 in 2012 to $ 4529 in the year 2013. The company can comfortably meet its current liabilities.

Debt ratio of the company has remained constant over the two periods standing at a value of $0.85. This means that we are not funding our assets and investments from the debts about from owners’ equity. This is a company that any investor would wish to invest his money into. The returns and ratios are quite impressive. The company’s debts, and profitability ratios should never go down below zero. This essay has discussed the uses and application of different financial ratios and how they can influence the decisions of investors.

References

Mardini, G. H., Crawford, L., & Power, D. M. (2015). Perceptions of external auditors, preparers and users of financial statements about the adoption of IFRS 8: Evidence from Jordan. Journal of Applied Accounting Research, 16(1), 2-27.