Financial Ratio Analysis Essay - 1420 Words

Before beginning an analysis of a company it is necessary to have a complete set of financial statements, preferably for the pas few years so that historical trends can be obtained. Ratios are a way for anyone to get an idea of the financial performance of a company by using the information contained in the financial statements. Ratios are grouped into four basic categories, liquidity, activity, profitability, and financial leverage. This document will use a variety of these ratios to analyze the firm, Sample Company, as of December 31,2000. Financial Statement Ratios Profitability Ratios The ratios returns on investment (ROI) and return on equity (ROE) are two of the most popular measure of profitability of a company and, along†¦show more content†¦In general, the average ROI for American merchandising companies is between 8% and 12% when using net income, and average margin is 5% to 10%. When using operating income it is between 10 and 15% and average margin is also 10% - 15%. Asset turnover is another important component of the DuPont model and is usually in the range of 1% to 1.5% ROE Ââ€" Return on Equity The return on equity conveys the profits of the company as a rate of return on the amount of owners equity. ROE uses average owners equity over the specified time period and net income. Historically a ROE of between 10% and 15% were considered average. Recently higher rates in growth industries have been greater. Price earnings ratio (P/E) In general, the higher the ROI and rate of earnings growth, the higher the P/E. . In the past, for a very long period of time P/E ratios in the range of 12 to 18 were consider good P/E ratios for a company. In recent years, the 12 to 18 values have been abandoned as a norm and what can be considered the norm now is under debate. Sample Companies Profitability Ratios ROI for Sample CO. is $350 / $7,196 = 4.8% using net income. If operating Income is used we have $498 / $7,196 = 6.9%. An additional measure used for ROI is the DuPont Model. The DuPont model figures are ($498 / $8,251) * ($8,251 / $7,196) = 6.0% using operating income. These are somewhat low when compared to the average. ROE is $350 / $3,357 = 10.4% and is also belowShow MoreRelatedFinancial Ratio Analysis : Financial Ratios Analysis1634 Words   |  7 Pages UNIVERSITY OF HOUSTON CLEAR-LAKE HADM 5233: FINANCIAL MANAGEMENT II ASSIGNMENT: FINANCIAL RATIO ANALYSIS UHCL Honesty Code â€Å"I will be honest in all my academic activities and will not tolerate dishonesty.† Uday Sekhar Reddy Mareddy Read MoreFinancial Ratios And Financial Ratio Analysis1797 Words   |  8 Pages Abstract The paper concentrates on the basic types of financial ratios and the importance of the financial ratio analysis. 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