EGT1 Task 3
To: Company G CEO
Date: February 20, 2013
Re: Comparing Company G against industry average
The first ratio calculated was current ratio. This is done by dividing current liabilities by current assets. Current ratio is important because it shows the business’s ability to pay back the current liabilities with the current assets that they have available to them. At the end of 2011, the current ratio was at 1.86. In 2012, this ratio dropped to 1.80. The industry ranges from 3.1 (showing a strong ability to pay back liabilities) to 1.4 (showing a weak ability to pay back liabilities) with a median of 2.1. Company G is below the median showing a weakness in this category.
Next we calculated acid test ratio. This is computed by available cash …show more content…
This is done by dividing operating income by interest expense. This ratio measures the amount of times operating income can pay for interest expense. A high ratio shows that the company can easily pay interest expense. In 2011, this ratio was 31.12. In 2012, this rose to 36.15%. Industry averages are 8.1 to 29.7%. Company G shows strength in this category as well meaning Company G does well generating income to pay its interest bearing expenses.
The next calculated ratio was rate of return on net sales. This was done by dividing net income by net sales. This ratio is simply showing us the percentage of each sales dollar earned as net income. In 2011, Company G’s ratio was 5.43%. By 2012, this rose to 6.35%. The industry average is 7.55 to 4.20%. At 6.35%, I would say Company G should have no concern in this category; they are above the median but below the high.
The rate of return on total assets is the next ratio. This is calculated by taking net income and adding interest expense; then dividing them by average total assets. This ratio measures a business’s success in using their assets to earn a profit. In 2011, the ratio was 12.30% and in 2012 it was 14.28%. This was a pretty good rise and sits well with the industry averages of 17.20 to 8.60%. I would say this is a strength as well for Company …show more content…
This is calculated by subtracting preferred dividends from net income and dividing by average common stockholders’ equity. This basically shows the income earned for each dollar invested by common shareholders. The industry average is 18.6% to 12.80%. Company G represents a financial strength in this category.
The next category is earnings per share of common stock. This is computed by taking preferred dividends and subtracting it from net income; then dividing that by number of shares of common stock outstanding. In 2011, this ratio was 0.672 and in 2012 it rose to 1.08. The industry average was 0.9 to 0.83. I would say company G has strength in this category compared to average. Companies should strive to increase this number by 10% each year.
Price earnings ratio is calculated by dividing market price per share of common stock by earnings per share. This ratio shows the market price of one dollar of earnings. In 2011, this ratio was $5.21 and in 2012 it rose to $5.32. The industry average ranges from 7 to 5.5. At $5.32, I would say company G shows weakness in this
Date: February 20, 2013
Re: Comparing Company G against industry average
The first ratio calculated was current ratio. This is done by dividing current liabilities by current assets. Current ratio is important because it shows the business’s ability to pay back the current liabilities with the current assets that they have available to them. At the end of 2011, the current ratio was at 1.86. In 2012, this ratio dropped to 1.80. The industry ranges from 3.1 (showing a strong ability to pay back liabilities) to 1.4 (showing a weak ability to pay back liabilities) with a median of 2.1. Company G is below the median showing a weakness in this category.
Next we calculated acid test ratio. This is computed by available cash …show more content…
This is done by dividing operating income by interest expense. This ratio measures the amount of times operating income can pay for interest expense. A high ratio shows that the company can easily pay interest expense. In 2011, this ratio was 31.12. In 2012, this rose to 36.15%. Industry averages are 8.1 to 29.7%. Company G shows strength in this category as well meaning Company G does well generating income to pay its interest bearing expenses.
The next calculated ratio was rate of return on net sales. This was done by dividing net income by net sales. This ratio is simply showing us the percentage of each sales dollar earned as net income. In 2011, Company G’s ratio was 5.43%. By 2012, this rose to 6.35%. The industry average is 7.55 to 4.20%. At 6.35%, I would say Company G should have no concern in this category; they are above the median but below the high.
The rate of return on total assets is the next ratio. This is calculated by taking net income and adding interest expense; then dividing them by average total assets. This ratio measures a business’s success in using their assets to earn a profit. In 2011, the ratio was 12.30% and in 2012 it was 14.28%. This was a pretty good rise and sits well with the industry averages of 17.20 to 8.60%. I would say this is a strength as well for Company …show more content…
This is calculated by subtracting preferred dividends from net income and dividing by average common stockholders’ equity. This basically shows the income earned for each dollar invested by common shareholders. The industry average is 18.6% to 12.80%. Company G represents a financial strength in this category.
The next category is earnings per share of common stock. This is computed by taking preferred dividends and subtracting it from net income; then dividing that by number of shares of common stock outstanding. In 2011, this ratio was 0.672 and in 2012 it rose to 1.08. The industry average was 0.9 to 0.83. I would say company G has strength in this category compared to average. Companies should strive to increase this number by 10% each year.
Price earnings ratio is calculated by dividing market price per share of common stock by earnings per share. This ratio shows the market price of one dollar of earnings. In 2011, this ratio was $5.21 and in 2012 it rose to $5.32. The industry average ranges from 7 to 5.5. At $5.32, I would say company G shows weakness in this