Financial ratios Financial ratios are key to success of any business. There are three reasons why we calculate financial ratios. Business ratios are calculated and benchmarked with industry ratios in order to establish the performance of the firm. We also compare the business ratios with the aggregate economy to estimate and understand the performance in changing economic times. In addition, we also compare the ratios with the company’s past performance which enables us to know the trend of the company. The ratios that are commonly calculated by any firm are several.
1. Debt to Equity ratio shows the financial leverage of a firm. This is the proportion of equity and debt used to finance its assets. The formula is total liabilities/shareholders equity.
2. Current ratio shows the ability of a company to pay off debts in the short run. Formulae: current assets/current liabilities.
3. Quick ratio is used to show the liquidity of a company in the short term. Formulae: (current assets-inventories)/current liabilities.
4. Return on equity is used to measure the amount of income returned on shareholders equity and profitability. Formula: Net income/shareholders' equity.
5. Net profit margin ratio is used to calculate how efficient a firm is. Efficiency translates to profitability and its formulae are net profit/net sales.
6. Return on assets ratio measures the efficiency of a firm in operating its assets to generate net income. Formulae: annual net income/average total assets.Answer 1
The return on assets ratio of the company increases from 2004 to 2009, then starts to decline from 2010 to 2013. This shows that efficiency on usage of assets increased at a rate of 12.38 to 18.47 in 2009 before reducing to 12.90. The shareholders are getting value for their stocks from 2004 when ROE is 19.74 to 2009 when it has peaked to 27.64. After this, it has reduced in the next years to a low of 18.84 in 2013 which is a worrying trend.
Return on capital invested is on a steady increase in the five years from 2004 at which the ROC was 15.71 to 2009 when the rate was 25.27. However, it has reduced over the years to 2013 when ROC is at a low of 18.04. Debt to equity ratio is at an average of about 1.5 to 1 over the period between 2004 t0 2013. In 2004, the financial leverage indicated is 1.55 and the figures show that it has decline to 1.45 in 2013 which indicates that the company has reduced its debt meant to finance the assets.Answer 2
The return, on assets average of the firms, is higher than the industry’s average, which is 2.05, while that of the firm is (2.82+2.97+3.42+2.58+6.29+13.71+2.51+0.9+0.94+1.46)/10=3.76 which is an indication of the company’s efficient use of its assets. The industry’s average on return on equity is 4.72 while that of the company is (6.21+6.16+6.62+4.79+10.54+22.31+4.63+1.87+2.05+3.42)/10=6.86. This shows that the firm is performing better that how the industry is performing.
The return on capital invested ratio of the industry is 2.44, and that of the company is high.(2.37+2.65+3.61+3.03+9.03+18.87+3.37+0.84+1.01+1.43)/10=4.62. It, therefore, shows that the company is performing better than the industry and hence able to generate more returns. The financial leverage industry ratio is 2.39, and that of the firm is low (2.15+2+1.87+1.84+1.54+1.67+2.02+2.14+2.22+2.46)/10=1.99. This indicates that the company has a better debt to equity ratio as compared to the industry.Answer 3
On average, the company’s stock prices are way better than those of its competitors according to S&P 500 valuation of the stocks. The valuation of S&P 500 shows that the price earnings of the competitors is higher at 17.9 while that of CHL over 5 years is 10.7. This indicates that the competitors are doing better. On the other hand, dividend yield of CHL in 5 years is higher than that of its competitors at which is at 3.6.
