Berkshire Hathaway Cash Position, Positive Cash Flow and Short-term financing

Running head: BERKSHIRE HATHAWAY INC. 1

BERKSHIRE HATHAWAY INC.    4

Berkshire Hathaway Inc.

David B. Jones

Financial Management

Richard Gordon

8/20/2020

Financial ratios

Category	Ratio	Berkshire Hathaway A	Blackrock,
Liquidity	Current ratio	1.80	2.11
	Quick ratio	1.5	2.11
Profitability	Profit margin	32%	30.8%
	Return on assets	10.7%	2.7%
Solvency	Debt ratio	0.48	0.79
	Interest coverage	26.93	29.51

The liquidity ratios include the current ratio and quick ratio. The current and quick ratios of the organization are 1.8 and 1.5, respectively. The two ratios show that the organization is in a position to pay its current liabilities using the total current assets or to use the most liquid assets of the company. The company is, however, less liquid compared to Blackrock Company which is one of its competitors in the market. The current assets of Blackrock are twice the current liabilities of the firm. The organization has the right liquidity ratios that prove the quality of financial management in Berkshire Hathaway Inc (Berkshire Hathaway Inc, 2019). 

The second category of ratios of the firm is profitability ratios. The profitability ratios examined are profit margin and the return on assets. The profit margin and return on assets of Berkshire Hathaway Inc. are 32% and 10.7% respectively. The two ratios show that the organization is generating sufficient revenue to cover the expenses of the firm and retained income for the shareholders and reinvestment. Berkshire Hathaway Inc. is more profitable than Blackrock Company since the profit margin and return on assets are 30.8% and 2.7% respectively. The profitability of Berkshire Hathaway Inc. is impressive. It would help in attracting more investors to boost the capital of the firm (Berkshire Hathaway Inc, 2019). 

The debt ratio of Berkshire Hathaway Inc. is 0.48 compared to 0.79 of Blackrock, which is one of its competitors in the industry. The debt ratio shows that the firm is doing well by maintaining a low debt ratio. The debt ratio shows that loans finance only less than 49% of the assets. The interest coverage ratio of the company is 26.93, while the interest coverage of the competitor is 29.51. The ratio shows that the two firms generate sufficient earnings before interest and tax expenses to cover the cost of the interest expense. Blackrock has a better ratio than Berkshire Hathaway Inc.

The financial health of an organization is measured examining the liquidity and profitability over a given period. Berkshire Hathaway Inc. has proven that it is a healthy organization based on the two metrics. The liquidity of the organization has been on the rise in the last three financial years. The increase in current ratio from 1.21 in 2017 to 1.8 in 2019 is an indication that the firm is becoming financially stable to handle its financial obligations. The health of the company is also measured using profitability ratios in a given period. The net profit of the firm increased from 22.9% in 2017 to 32% in 2019, an indication that the firm is on the right financial track (Berkshire Hathaway Inc, 2019). 

The company has a high current ratio that needs to be reduced to invest the idle cash to other projects to boost the revenue of the firm. The current assets held by the firm should be adequate to cater for the current obligations while channeling excess resources to the investment department. The interest expenses of the firm seem to be high, thus posting lower interest coverage compared to Blackrock's ratio (Mullaney, 2020). The interest coverage can be increased by reducing the interest expense through reduced debt financing or increase of EBIT through reinvestment of extra resources in the company.

References

Berkshire Hathaway Inc. (2019). Berkshire Hathaway (BRKA) balance sheet. Investing.com. https://www.investing.com/equities/berkshire-hathaway-inc-balance-sheet

Mullaney, T. (2020, February 26). For investors shaken by Dow plunge, Warren Buffett's new advice on finding long-term market winners. CNBC. https://www.cnbc.com/2020/02/26/warren-buffetts-new-advice-on-how-to-find-long-term-stock-winners.html