HELP - discussion 8 PDF

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Provides some help with the discussion in UNIT 8...

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Last week, you performed a trend analysis for the manufacturing company you selected in week 2. For this week, refer back to that company and assess the financial statements using the ratio tools you have acquired in the course. Select at least one profitability, liquidity, solvency, and market valuation ratio and evaluate the results. Based on your findings, post an initial response to the following:  

What do the metrics tell you about the company’s performance? Support your answer by explaining the results from your assessment. If you were considering investing in the company, what other questions would you ask to gain further insight into the performance?

Financial Ratios are used to make comparisons between different aspects of a company's performance or between different companies. They reveal very basic information such as whether you have accumulated too much debt, stockpiled too much inventory or are not collecting receivables fast enough (BDC, n.d.). Financial ratios in companies typically have 4 classifications: Profitability (performance) ratios – assesses the ability to generate profit, Liquidity ratios - assesses the ability to pay its short term bills, Solvency ratios – assesses the ability to generate cash from a long- term solvency point of view and Market value (Return on investment ratios) – reveals the return on investment –company stock value. Profit Margin Ratio: is a profitability ratio that shows the profit generated for each dollar in net sales (Heisinger & Hoyle, n.d.). It represents what is left over from sales after all expenses have been paid (profit). A higher ratio indicates effective management of expenses relative to its net sales Profit margin ratio = net income/net sales For GSK, the profit margin ratio - 4,645,000 / 21,891,000 = 21%. While the benchmarks vary widely by industry and company size, a 20% margin is considered high or “good” (Corporate Financial Institute, n.d.) Current Ratio: is a liquidity ratio that measures the company’s ability to pay short term obligations within the period of one year with its current assets. A higher ratio indicates a better ability to raise funds to pay for liabilities. Current ratio = current assets/current liabilities For GSK, the current ratio – 19,491,000 / 24,050,000 = 0.81:1. A ratio under 1 indicates that the company’s debts due in a year or less are greater than its assets (Kenton, 2020) and may have difficulties meeting up to their short term liabilities

Debt Ratio: is a solvency ratio that measures the company’s’ ability to satisfy its long-term obligations. The higher the ratio, higher the leverage and higher is the financial risk on account of heavy debt obligation Debt ratio = Total liabilities/Total assets. For GSK, the debt ratio – 61,335,000 / 79,692,000 = 0.77:1. If the ratio is less than 0.5, most of the company's assets are financed through equity (Wikepedia, n.d.) and a debt ratio greater than 1.0 (100%) tells you that a company has more debt than assets (Hayes, 2019) Price Earnings Ratio: is a market value ratio that compares the stock price per share to the earnings per share. It is a simple way to assess whether a stock is over or under valued Price- Earnings Ratio = share price / earnings per share For GSK, the Price Earnings ratio = 46.99/ 2.38 = 19.74. A higher P/E ratio shows that investors are willing to pay a higher share price today because of growth expectations in the future. Stocks with P/E ratios of below 15 are considered cheap, while stocks above about 18 are thought of as expensive (Borzykowski, 2020). However, a company with a high ratio could have high growth prospects. Its ratio is high because it just spent a lot of money to grow its business. So it could still be a good buy. The metric noted above indicates that GSK is performing reasonably well, and appears to have made some recent investments that are yet to yield positive returns. They have a healthy profit margin. Prior to investing in GSK, I would recommend performing a fundamental analysis – all ratio calculations related to market value ratios. Other factors to consider are the company’s value in terms of its brand visibility, the quality or experience of its executive board, its approach to corporate governance and the company’s overall business model (Lake, 2019)

References: BDC (n.d.). 4 ways to assess your business performance using financial ratios. Retrieved from https://www.bdc.ca/en/articles-tools/money-finance/managefinances/pages/financial-ratios-4-ways-assess-business.aspx Borzykowski, B. (2020, May 5) What P/E can tell you about a stock, and what it can’t. Retrieved from https://www.moneysense.ca/save/investing/what-is-price-to-earningsratio/ Corporate Financial Institute (n.d.) What is a profit margin? Retrieved from https://corporatefinanceinstitute.com/resources/knowledge/accounting/profit-margin/ Kenton, W. (2020, April 28) Current ratio. Retrieved from https://www.investopedia.com/terms/c/currentratio.asp

Hayes, A. (2019, April 20) Debt ratio definition. Retrieved from https://www.investopedia.com/terms/d/debtratio.asp Heisinger, K., & Hoyle, J. B. (n.d.). Accounting for Managers. Retrieved from https://2012books.lardbucket.org/books/accounting-for-managers/index.html Lake, R. (2019, September 19). How fundamental analysis is used to analyse stocks. Retrieved from https://smartasset.com/investing/fundamental-analysis Wikepedia (n.d.) Debt ratio. Retrieved from https://en.wikipedia.org/wiki/Debt_ratio Yahoo finance (n.d.) GlaxoSmithKline plc (GSK). Retrieved from https://finance.yahoo.com/quote/GSK/financials/...