Ratio analysis is a useful tool for analyzing financial statements. Calculating ratios will aid in understanding the company’s strategy and in understanding its strengths and weaknesses relative to other companies and over time. They can sometimes be useful in identifying earnings management and in understanding the effect of accounting choices on the firm’s reported profitability and growth. Finally, the ratios help in obtaining a better understanding of a firm’s current profitability, growth, and risk which can improve forecasts of future profitability and growth and estimates of the cost of capital.
In reviewing the basic financial ratios, we will examine the ratios of Best Buy…show more content… Disaggregating the Asset Turnover Ratio To better understand why the asset turnover ratio changed, the analyst can examine the productivity of important assets such as accounts receivables, inventory, and fixed assets at generating sales.
Accounts Receivable Turnover The accounts receivable turnover measures the rate at which the firm collects its accounts receivables. The accounts receivable turnover is calculated as follows: Net Credit Sales Average Accounts Receivables
The average number of days’ accounts receivables were outstanding during the period can be calculated by dividing the accounts receivable turnover into 365 days as follows:
365/Turnover = # of days Accounts Receivables were outstanding during the year, on average Best Buy
2002 2001 AR turnover 19497 (247 + 209)/2
= 85.95 4.25 days 15327 (209 + 189)/2
= 77.02 4.74 days Most of Best Buy’s transactions are for cash or credit cards; therefore, the number of days’ sales outstanding is very small, approximately 4 days.
Inventory Turnover Inventory turnover measures the average days that the firm’s inventory was on hand during the period. The inventory turnover is calculated as follows: Cost of Goods Sold Average Inventory
The average number of days the inventory was on hand can be calculated by dividing the inventory turnover into 365 days as follows: 365/Turnover = # of days inventory on
usages for comparative and ratio analysis. The use of multiple sets of data for comparison to detect trends is comparative analysis. Comparative analysis demonstrates trends within an organization. With continued use, Comparative analysis can identify diminishing trends through the use of quarterly data analysis. Ratio analysis also helps to establish trends, and make financial comparisons that assist management in making healthy financial decisions. Also, ratio analysis identifies strengths and weaknesses…
Ratio Analysis April Helle HCS/571 Professor Shawishi Haynes September 23, 2013 Organizations all have budgets with these budgets they must have ratios to analyze. In this paper ratio analysis will be discussed. Two ratios will be named from each major group from the financial group selected. Examples will be selected with calculations and evaluations of the meaning of the results related to the financial health of the organization. Factors…
Ratio Analysis Danny Puig HSC/571 March 29, 2012 Instructor: Karla Vincent Ratio Analysis Concepts of Ratio and Ratio Analysis A simple definition of ratio is given in Chapter 7 of the book Financial Managers for Nurse Managers and Executives by S. A. Finkler. "A ratio is an examination of the relationship between two numbers. This is accomplished by dividing one number by another. Sometimes the result is multiplied by 100% to convert it…
A ratio is an expression of the relationship of one item to another. A ratio can be expressed as a percent rate, or proportion. Ratios are particularly important in understanding financial statements because they permit us to compare information from one financial statement with information from another financial statement. Financial ratio analysis uses formulas to gain insight into the company and its operations. For the balance sheet, using financial ratios can show you a better idea of the…
presented for 3 organisations of which you are required to do some form of financial analysis. As a structure, although you have only 2 point references given, you should structure your analysis along the following lines; • Profitability o Return on Capital Employed o Gross Profit Margin o Operating Profit Margin o Net Asset Turnover • Activity Ratio o Trade Receivables Days / Debtor Days o Trade Payables Days…
The price earnings ratio is a market expectation ratio, which measures the market value of a stock relative to its earnings by comparing the market price per share by the earnings per share. The price earnings ratio illustrates the willingness of market to pay particular amount for a stock depending on its current earnings. It is useful to use P/E ratio in the case of Nike because all companies analysed belong to the same industry. However, it is also worth nothing that P/E ratio is based on the calculation…
3. Introduction to Financial Ratios Financial ratios are dealings determined from a firm's financial information and used for comparison purposes in financial means. Some of the financial ratios are Profitability ratios, Liquid ratios, Capital structure ratios, Assets management ratios and Market value ratios. Sub-categories of these ratios are defined below. 3.1 Profitability Ratios A category of financial metrics used to evaluate a business's ability to generate profit as compared to its expenses…
PERFORMANCE ANALYSIS] | Submitted as a part of module assessment for Accounting and Control | CONTENTS: Page Number 1. INTRODUCTION 2 1.1 DOMINO’s at LONDON STOCK EXCHANGE And Trading Information 2 2. FINANCIAL RATIO ANALYSIS ON DOMINO’s PIZZA UK & IRL PLC’s PERFORMANCE 3 3.1 PROFITABILITY RATIOS 3-4 3.2 LIQUIDITY RATIOS 5-6 3.3 EFFICIENCY RATIOS 7-8 3.4 GEARING RATIOS 9-10 3.5 EMPLOYEE RATIOS 11…
Financial Ratios Analysis and Comparison Paper Dianne Davis MHA 612 Professor Johnson June 7, 2014 Abstract It is important for healthcare organizations to understand their present performance and weak areas in order to generate more effective operational strategies. Financial ratio analysis is an effective tool to determine hospital’s performance on several indicators such as ability to pay debt, capability to generate revenue, and sales performance etc. The objective…
IMPORTANCE OF RATIO ANALYSIS Streamlines Accounting Figures: The most huge goal of Ratio analysis is that it rearranges the bookkeeping figures in much less demanding route by which anybody can be comprehended it effectively actually for the individuals who don't have the foggiest idea about the dialect of bookkeeping. Measures Liquidity Position: Liquidity position of a firm is said to be acceptable on the off chance that it has the capacity meet its current commitment as and when they develop…