Financial Statement Analysis

Financial Statement Analysis

University of Phoenix

Learning Team A

Boucher, Allison; Brown, John; Davis, Margaret;

Funk, Jason; and McLeod, Odette

ACC/561

Professor Carla Ross

November 9, 2009

Introduction

When checking the financial health of a company, one would say that it is the same as analyzing its financial statements. The vital signs are tested mostly by various financial ratios calculated from the financial statements. These vital signs can be classified into three main categories. The short-term liquidity, which is the business survival, by paying the bills, meets the payroll as well as coming up with the rent. In other words, "Is there enough liquidity to provide the cash needed to pay current financial commitments?" Long-term solvency focuses on a firm's ability to pay the interest and principal on its long-term debt, while profitability is the lifeblood of a business. (Leka, 2007)

Businesses that earn incomes can survive, grow, and prosper; therefore it is important to analyze its profitability. Financial statements are required by law to be uniformed. This uniformity in the Unity States is created by the Financial Accounting Standard Board (FASB) and outside of the Unity States is the International Accounting Standard Board (IASB), who controls the financial statements regularity. The impact of this type of uniformity creates huge benefit to accountants; it allows them to standardize how a company compares to other companies across industries. The presentation of the financial statements is as uniformed. The authors of this paper have analyzed three companies Wal-Mart, Dell, and Toyota where various ratios have been computed based on their 2008 reporting period.

Financial Analysis Computations

Quick current liquidity ratios:

The current ratio computes current assets with current liabilities. These are divided by accounts payable, short-term bank debt, accrued liabilities, and other current liabilities (Fields, 2002). These numbers when computed produce a ratio that indicates the relative liquid health of the subject company. Wal-Mart is a United State based international discount Retail Company. Wal-Mart's "current" ratio for the year 2008 is 0.8. Initially this indicates that Wal-Mart may have an unhealthy cash position. Wal-Mart has a "quick" ratio of 0.2 this reflects an increase in accounts payable and commercial paper. Wal-Mart increases in debt and accounts payable adversely affected its liquidity for the reporting year 2008.

Dell is an international computer manufacturer company that has had a "current" ratio of 1.1 reporting year 2008. Dell's ratio indicates a good financial position. Dell's statement reflects an increase in accounts receivable allowing their billing cycle to improve their "current" ratio beyond what it might be, if Dell was paid for its inventory sooner. When inventory is taken out of the equation and a "quick" ratio is computed, the result is 0.8, which indicates that Dell has a solid position of profitability. The third company chosen is Toyota Motor Corporation, whose "current" ratio is 1.0. Toyota experienced a decrease in inventory during FY-08, which helped to boost its ratio. Toyota's "Quick" ratio is 0.7, a decrease in accounts receivable.

The DuPont ratio and Profit Margin:

The DuPont and profit margins for Wal-Mart, Dell, and Toyota are listed below using the data collected from their references.

Wal-Mart: DuPont Ratio: ROE= (Profit Margin)*(Asset Turnover)*(Equity Multiplier)

ROE= (0.0330)*(2.4819)*(2.5033)

ROE= 0.2050

ROE %= (0.2050)*(100) =20.5%

Profit Margin: Gross Profit/Total Revenue = gross profit margin

95,086.0 / 405,607.0 = 23.4% profit margin.

In analyzing the DuPont ratio, Wal-Mart has a ROE of 20.5%, which states, 20.5% of their net income returned on the money invested by shareholders. In knowing that the ROE is also used for comparing the company's profitability to others, Wal-Mart's ROE show's that they are a strong company is tough economic times.

Toyota Motor Corporation: DuPont Ratio: ROE= (Profit Margin)*(Asset Turnover)*(Equity Multiplier)

ROE= (-0.213)*(0.706)*(2.889)

ROE= -0.434

ROE %= (-0.434)*(100) = -43.4%

Profit Margin: Gross Profit / Total Revenue = gross profit margin

21,316.3/211,023.5 = 10.1% profit margin.

The data shows that Toyota's ROE is -43.4, indicating that the company is experiencing trouble times. This is not good for shareholders and future investor's. The profit margin is low and needs to be improved.

Dell Inc.: DuPont Ratio: ROE= (Profit Margin)*(Asset Turnover)*(Equity Multiplier)

ROE= (0.0580)*(1.3151)*(4.72)

ROE= 0.36

ROE%= (0.36)*(100) =36%

Profit Margin: Gross Profit / Total Revenue = gross profit margin

10,957,000/61,101,000 = 17.9% profit margin.

In review of the data analyzed, it shows that Dell is a good investment, even though the profit margin is high. The high ROE is a good sign for investor's to invest into the company.

Asset Utilization:

There are four ratios that is used measure the asset utilization of Wal-Mart, Toyota, and Dell. The most commonly used ratios is the Receivables Turnover ratio, which is computed by dividing Annual Credit Sales by Accounts Receivable. This ratio shows how fast a firm collects its receivables. The following table shows my results:

Company Annual Credit Sales Accounts Receivable Ratio

Wal-Mart Not able to calculate credit card sales because they are included in the total receivables. This is noted in the notes to the financial statements, and the breakdown of this account is not available.