Problem:
Look at the total liabilities, shareholders, total revenue, and net profit. For each company I need to calculate the following ratios. Equity to Debt, Return on Investment and Profit Margin. Next, interpret the results. Explain the ratios mean. Which company is a better investment based on these three ratios? I will need to turn in financial statement with my assignment with the numbers circled or highlighted, would be fine.
Introduction to Business:
Financial Ratios Assignment
1. Identify 2 competing companies.
2. Obtain the Income Statement (Profit & Loss) and Balance Sheet for each company. Use a similar period for each company. For example, annual reports for the 1st company might be for year ending Dec 2004, and 2nd company might be annual reports ending Feb 2005. If you use quarterly information, make sure it is for the same quarter and year.
3. For each company, locate the following numbers.
• Total Liabilities (from Balance Sheet – may need to calculate.)
• Total Shareholders’ Equity (from Balance Sheet)
• Total Revenue or called Sales (from top of Income Statement)
• Net Profit or called Net Income (from bottom of Income Statement)
4. For each company, calculate the following ratios:
• Equity to Debt [(Total Shareholders’ Equity) ÷ (Total Liabilities)]
• Return on Investment (or Return on Equity)
[(Net Profit ÷ Total Shareholders’ Equity)]
• Percent Profit Margin [(Net Profit) ÷ (Total Revenue)]
5. Interpret the results. Explain what the ratios mean. Which company is a better investment (or better managed) based on these three ratios? Explain. What other ratios and information might influence your decision? Why did I insist you use competing companies?
6. Turn in the financial statements with your assignment with the numbers you used circled.