Financial Ratios Discussion Assignment Help
Define the following ratios, note the ratio for your business, and explain what the ratio means for the business moving forward: a) Return on Assets b) Return on Equity c) Return on Capital d) Gross Margin e) SG&A Margin f) Current Ratio g) Quick Ratio h) Total Debt/Equity i) Total Revenue j) Gross Profit
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Introduction
Financial ratios will provide comprehensive information on the current status of the business and the financial position of the company. The financial ratios of the company will be employed to take up the decisions about the organizational current financial status quos; also it will be employed to take up decisions regarding investment and other key decisions like mergers acquisitions etc. The following part of the write-up is aimed to discuss some of the key financial ratios employed in the financial statement of the organization. In the Appendix the financial statement of the GE (General Electric) company of United States is provided.
A) Return on Assets
Return on Assets(ROA) indicates the proportion of the net income in the total assets of the organization.They will provide information about how good the company is functioning. Normally this ratio is employed to compare the performance of few different organizations. ROA will take into consideration of the current debts of the company, unlike other ratios like Return on equities. For GE ROA is in falling trend and in the current 2018-12 it is -6.67% only (Brigham et al., 2016).
B) Return on Equity
The ratio of the net income of the company and the share holder's equity will provide the return on equity of the company. Return on equity for GE is -47.89% for 2018-12, which is very much low when compared with the past few years track.
C) Return on capital
Return on capital employed (ROCE) is a financial ratio that will work to measure the company profits and the performance levels with which the organization's capital is being used. Finally the earnings of the organization before paying the taxes and interests and their proportion in the total capital will makes up the ROCE. Whereas the capital of the organization will mean the difference between total assets and the liabilities of the organization.
D) Gross margin
Gross margin is the difference between the net sales revenue of the organization and the cost of the goods sold(COGS). The difference between the revenues and the total costs involved in the production of the goods or the services makes up the gross margin. Net sales is the difference between the gross sales and the returns, allowances and the discounts. Higher the gross margin, more profitable the company is working(Brealey et al.,2012). Gross margin of the company is 21.2%.
E) SG & A margin
SG and Margins refers to the initial expenses accounted in the financial statement for the sake of writing the selling, general and Administrative expenses. These are not related to the generation of the product or the service. The first of this margin is the selling margin, which accounts for the direct and indirect selling expenses. Also they will include the salaries of labour. General operating expenses and taxes will include the expenses in operation of the company. Administration expenses are related to the executive salaries and related expenses. Operational taxes are also included. SG&A margin is 13.17% for GE as per the latest measures of 2018-12. It is in the falling trend, which is a positive feature, however to be verified from the total volume of the sales.
F) Current Ratio
Current ratio is the liquidity ratio, which will measure the company ability for paying the short term obligations. Normally those dues within a year will be presented here. Typically it will indicate how the current assets can be maximized on the balance sheet for satisfying the current debt and payables as well. A low current ratio may mean a strong operating cash flow in the organization. If the current ratio of the organization is too high, it is more likely that the company may be not employing its current assets for the sake of its short term financing facilities efficiently. Poor working capital management may be the cause of such situation(Williams & Dobelman,2017).
G) Quick Ratio
H) Quick ratio is also an acid test ratio.
Typically the ratio will provide information on current capacities to meet the short term obligations. The ratio is defined as the ratio of total CE,MS and AR with CL. Quick ratio is at 1.50 for GE. QR = (CE+MS +AR)/CL Specifically this ratio will provide short term liquidity status of the company.
[CE is the cash and equivalents, MS is the marketable securities value and AR is the accounts receivable values with current liabilities.]
I) Total Debt/Equity
Total liabilities of the company when divided by the shareholder's equity will provide D/E ratio. The financial leverage can be estimated by this ratio. D/E ratio is very much significant for corporate finance. Operations based on own funds and the debt based funding can be differentiated using this ratio. Share holder equity and the capacity to meet the outstanding debts if the business is down, can be computed with this ratio. It is 3.13 for 2018-12. It is in the increasing trend indicating not a healthy position.
J) Total Revenue
Total revenue is the total receipt from the sale of all the services and goods from the organization. It will refer to the organization's overall revenues from the sale of all the goods and the services from the organization. For 2018-12 it is about 121,616 Million USD, not much from the previous track, however it has not fallen much.
K) Gross profit
The cost of the goods and the revenues will make up the Gross profit for the organization.
The difference will be marked on the financial statement and will be a significant ratio for the organization. Gross profit is 25,000 Million USD but it is lower than the previous years, which indicating bad position of the company.
Conclusion
When compared with raw data from the financial reports, financial ratios will provide more comprehensive information about the status of the organizational financial performance. Specifically information like how the financial performance of the organization is lying at present and related information can be comprehended. Further the specific focus on areas of significance like current liquidity potential, debt payback capacity, Return on Assets and Return on equities will provide concentrated focus on the organization performance and this in turn will work on to take up key decisions for the financial functions of the organization. Ratios are normally classified into few key categories like liquidity ratios, activity ratios, debt ratios, profitability ratios and market ratios as per their relevance and accordingly they will be employed for decision making.
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