Financial Statement Analysis in different sectors
Financial Statement Analysis
Through the analysis of three companies in different sectors, this paper will show some basic concepts, techniques, and conventions of financial accounting. The three different areas Team B covered include a manufacturing company (3M), an IT service company (Fujitsu), and a retail company (Publix). Team B used the information provided by these companies to calculate its main financial ratios, and compare those to the ratios common for the same industry and country. The purpose of this paper is to analyze the aforementioned company’s financial position and how they differ from a cash or accrual basis. It was necessary to calculate such ratios as current and quick liquidity ratios, the DuPont ratio (also called the return on equity), gross profit margin, asset utilization ratios (receivables and inventory turnover were selected for this category) and financial leverage ratios (represented by debt ratio and debt-to-equity ratio).
Liquidity ratios indicate the ability of the company to maintain its short-term financial obligations (Fabozzi & Drake, 2009). Current ratio is calculated as current assets divided by current liabilities; quick ratio is obtained by dividing the difference of current assets and inventory to liabilities. The DuPont ratio shows the earnings of the company compared to the amount of common stock investment and is calculated as net income divided by shareholders’ equity. Gross profit margin shows the company’s financial health and shows the part of finance that is left after deducting cost of revenue (Nikolai & Bazley & Jefferson, 2009). Gross profit margin is calculated as revenue minus cost of revenue, and that value is divided by revenue. In general, a higher profit margin shows greater efficiency of the company (Nikolai & Bazley & Jefferson, 2009).
Primary measures of asset utilization are receivables turnover, i.e. the figure showing how quickly the company collects its
Through the analysis of three companies in different sectors, this paper will show some basic concepts, techniques, and conventions of financial accounting. The three different areas Team B covered include a manufacturing company (3M), an IT service company (Fujitsu), and a retail company (Publix). Team B used the information provided by these companies to calculate its main financial ratios, and compare those to the ratios common for the same industry and country. The purpose of this paper is to analyze the aforementioned company’s financial position and how they differ from a cash or accrual basis. It was necessary to calculate such ratios as current and quick liquidity ratios, the DuPont ratio (also called the return on equity), gross profit margin, asset utilization ratios (receivables and inventory turnover were selected for this category) and financial leverage ratios (represented by debt ratio and debt-to-equity ratio).
Liquidity ratios indicate the ability of the company to maintain its short-term financial obligations (Fabozzi & Drake, 2009). Current ratio is calculated as current assets divided by current liabilities; quick ratio is obtained by dividing the difference of current assets and inventory to liabilities. The DuPont ratio shows the earnings of the company compared to the amount of common stock investment and is calculated as net income divided by shareholders’ equity. Gross profit margin shows the company’s financial health and shows the part of finance that is left after deducting cost of revenue (Nikolai & Bazley & Jefferson, 2009). Gross profit margin is calculated as revenue minus cost of revenue, and that value is divided by revenue. In general, a higher profit margin shows greater efficiency of the company (Nikolai & Bazley & Jefferson, 2009).
Primary measures of asset utilization are receivables turnover, i.e. the figure showing how quickly the company collects its
References: Fabozzi, Frank A. & Drake, Pamela Peterson. (2009). Finance: capital markets, financial management, and investment management. John Wiley and Sons. Nikolai, Loren A. & Bazley, John & Jones, Jefferson P. (2009). Intermediate Accounting. Cengage Learning. Warren, Carl S. (2008). Survey of Accounting. Cengage Learning. Retrieved on September 11, 2010 from http://www. finance.google.com.