Iycee Charles de Gaulle Summary Financial analysis ratios Essay

Financial analysis ratios Essay

Financial Analysis Ratios

1.         Financial Analysis
Financial Statement is a company’s way to communicate its performance with surrounding societies especially investors in order to expose management’s efforts and company’s condition within a given period. Questions like, how is the company growing? Does the company use its resources wisely? Is it safe to invest our money in it? Underlie investors to assess a company’s performance.

Due to the importance of these financial statements, public companies are obligated to make records of their performances regularly such as annual and quarterly reports, using indicators that are regulated by a trusted board of Accounting in their country.

Concerning the financial performance, this paper will elaborate financial ratios for two companies’ they are SAIC (Science Applications International Corporation), a SAIC is a leading systems, solutions and technical services company; and Boeing Corp, the world’s leading aerospace company and the largest manufacturer of commercial and military aircraft. Since there are many kinds of financial ratios, this paper only select six of them that address three general topics; they are operating profitability, asset utilization, and risk management.

2.                  Analysis of Financial Statement

2.1   Operating profitability

Measurement of a company’s profitability becomes the concerns of owners, creditors, and managements since it highlights the firm’s ability to operate efficiently. A Common-Size Income Statement, which expresses each income statement item as a percentage of sales, allows for easy evaluation of the firm’s profitability relative to sales (“Analysis”). Two of indicators that highlight operating profitability are as follows

§

And,

§

By using the two indicators, we can obtain the profitability for SAIC and Boeing as shown in the following table:

Table 1     Operating Profitability of SAIC and Boeing

Net Profit Margin

Net Profit After Taxes
Sales
Net Profit Margin
SAIC
$927,000,000
$7,792,000,000
11.90%
Boeings
$2,572,000,000
$54,845,000,000
4.69%
Return on Total Assets (ROA)

Net Profit after Taxes
Total Assets
ROA
SAIC
$927,000,000
$5,655,000,000
16.39%
Boeings
$2,572,000,000
$60,058,000,000
4.28%

2.2   Asset Utilization

Asset Utilization is a process that divides a portfolio among major asset categories such as bonds, stocks or cash. The purpose of this process is to decrease risk by diversifying the portfolio. In addition, asset utilization ratios are also useful in tracing corporate sales.

Two kinds of indicators in the assets utilization that we use in analyzing the two companies; the indicators are:

And,

Table 2     Asset Utilization

Receivables Turnover

Sales
Receivables
Receivables Turnover
SAIC
$7,792,000,000
$1,517,000,000
5.14
Boeings
$54,845,000,000
$5,246,000,000
10.45
Total Assets Turnover

Sales
Total Assets
Total Asset Turnover
SAIC
$7,792,000,000
$5,655,000,000
1.38
Boeings
$54,845,000,000
$60,058,000,000
0.91

2.3   Risk Management

            In the absence of debt, a ‘100% equity’ company depends entirely on economic and business climate to produce corporate growth. Perhaps the most appropriate ratio to describe business risk is the Return on Equity. The core of business risk lies on the uncertainty of ROE projections in which a high ROE means a low business risk and a low ROE implies a high business risk. ROE can be calculated by using following equations:

Table 3     Risk Management of SAIC and Boeings

Risk Management

Net Income
Shareholders’ Equity
ROE
SAIC
$927,000,000
$2,807,000,000
33.02%
Boeings
$2,572,000,000
$11,059,000,000
23.26%

The above tables shows that SAIC can generate more revenue with the money shareholders have invested than Boeings.

Reference

Ameritrade. Understanding a Company’s Income Statement. Retrieved October 6, 2006 from http://www.ameritrade.com/education/html/encyclopedia/tutorial2/t2_s7.html

Analysis of Financial Statements. Retrieved October 6, 2006 from www.ey.com

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