JPMorgan Chase & Co is a commercial and an investment banking institution based in the United States. It was formed in 2000 when Chase Manhattan Corporation merged with JPMorgan & Co. It is one of the oldest and well known banking institutions in the USA and leads in investment banking, commercial banking, small businesses and financial services for its customers (Weston, Mitchell, & Mulherin, 2013).
The company operations in the recent years is characterised by increased international activities and operation in its business. It is divided on business segments on a line of business. The parent company is the head office where all the operations are monitored to enhance efficiency. The firm is based on the employee benefits incentive which ensures that the personnel are happy working in the company. Therefore, the operations of the firm have been improved over the years by the management.
Ratio analysis refers to the process of determining, analysing and interpreting relationships by using financial statements. It is majorly used to evaluate various aspects of a firm’s financial and operating performance such as profitability, liquidity, efficiency and solvency. The trend is then studied to determine whether they are deteriorating or improving (Brigham, & Ehrhardt, 2013).
Profitability Ratios
Gross Margin measures how profitable a firm can sell its inventory.
Gross margin = Gross Margin/Net Sales
= 99755/ 92716 = 1.08
High gross margin ratio means a company will have more money to pay operating expenses such as utilities, rent and salary.
Return on assets ratio measures the net income generated by total assets during the period by comparing net income by average total assets.
Return on Assets = Net income/ Average total assets
= 24,442/ 2,351,698 = 1.03
The ratio is more favourable to investors since it shows the firm is more effective in managing its assets to produce greater incomes.
Return on equity is a ratio that measures the ability of the company to generate investments from shareholders’ funds.
Return on equity = net Income/ Shareholders Equity
= 24,442/ 247573= 0.1
A return of one means that each dollar of shareholders’ equity generates one dollar of income.
Liquidity Ratios
Acid test ratio or quick ratio measures the ability of a firm to pay its liabilities when it becomes due using its quick assets
Quick ratio = cash+ Cash equivalents-Prepaid expenses/ Current liabilities
= 573089/ 1752478 = 0.3
It shows how well a firm can convert its assets into cash to pay its current liabilities.
Current Ratio measures a company’s ability to pay off its short term liabilities using its current assets.
Current Ratio = current assets/ Current Liabilities.
=1787271/ 1752478 = 1.02
Higher ratio is favourable since the firm can easily make current debt payment.
Efficiency ratios
Asset Turnover ratio measures the firm’s ability to generate sales from its assets by comparing its net sales by the total assets.
Asset Turnover = Net Sales/ Average total assets
= 1010018 /2351698 = 0.04
A ratio of 1 means that the company generates one dollar of sales for every dollar invested in assets.
Accounts receivable ratio measures the number of times a business can turn its accounts receivable into cash.
Accounts receivable = Net credit sales/ average accounts receivable
= 92716 /87353 = 0.1
Higher ratio is favourable.
Solvency ratios
Debt to equity ratio compares a company’s total debt to its total equity.
Debt to equity = Total liabilities/ Total equity
= 2104125/247573 = 8.5
A debt ratio of one means investors and creditors have equal stake on the company.
Equity ratio measures the amounts of money financed by owners of the company.
Equity ratio = Total equity/ Total assets
= 247573/ 235169 = 1.05
Economic value of equity is a cash flow analysis that takes the present value of the assets cash flows and subtracts the present value of all the liability cash flows. It is used by banks for asset/liability management. The value of bank’s liabilities and assets is directly linked to the interest rates. The banks are able to construct models that portray the effects of several interest rate changes on its total capital. EVE is a risk analysis tool that allows banks to prepare well against constantly changing rates of interest (Brigham, & Ehrhardt, 2013).
The changes in economic value of interest sensitivity form December 2014 to December 2015 for the company was caused by several reasons. The company uses derivative statements and investment securities as liability and asset management tools with the overall aim of controlling the volatility of net interest incomes from changes in interest rates.
References
Brigham, E., & Ehrhardt, M. (2013). Financial management: Theory & practice. Cengage Learning.
Weston, J. F., Mitchell, M. L., & Mulherin, J. H. (2013). Takeovers, Restructuring, and Corporate Governance: Pearson New International Edition. Pearson Higher Ed.
