The company that I have selected for Financial Ratio analysis is GOOGLE. The Ratios that I am going to analyze are grouped under four main headings: 1) Profitability Ratio 2) Liquidity Ratio 3) Debt Ratio 4) Market Ratio
1. Profitability Ratio - Profitability ratios measure the firm's use of its assets and control of its expenses to generate an acceptable rate of return.
a. ROE - Return On Equity - Measures the rate of return on the ownership interest (shareholders' equity) of the common stock owners. ROE is viewed as one of the most important financial ratios. It measures a firm's efficiency at generating profits from every dollar of net assets (assets minus liabilities), and shows how well a company uses investment dollars to generate earnings growth. ROE is equal to a fiscal year's net income divided by total equity expressed as a percentage.
b. ROI - Return On Investment - Is the ratio of money gained or lost on an investment relative to the amount of money invested. ROI is used to compare returns on investments where the money gained or lost — or the money invested — are not easily compared using monetary values. ROI is a measure of cash (or potential cash) generated by an investment, or the cash lost due to the investment. It measures the cash flow or income stream from the investment to the investor. Cash flow to the investor can be in the form of profit, interest, dividends, or capital gain/loss. Capital gain/loss occurs when the market value or resale value of the investment increases or decreases. Cash flow here does not include the return of invested capital.
2. Liquidity Ratio - Liquidity is a measure of the ability of a debtor to pay their debts as and when they fall due. It is usually expressed as a ratio or a percentage of current liabilities. Hence, Liquidity ratios measure the availability of cash to pay debt. a. Current Ratio - The current ratio is a financial ratio that measures whether or not a firm has enough resources to pay its debts over the next 12 months. It compares a firm's current assets to its current liabilities. The current ratio is an indication of a firm's market liquidity and ability to meet creditor's demands. Acceptable current ratios vary from industry to industry. If a company's current assets are in this range, then it is generally considered to have good short-term financial strength. If current liabilities exceed current assets (the current ratio is below 1), then the company may have problems meeting its short-term obligations. If the current ratio is too high, then the company may not be efficiently using its current assets.
3. Debt Ratio - Debt ratios measure the firm's ability to repay long-term debt. Debt ratios measure financial leverage. It is the ratio of Total Liabilities to Total Assets 4. Market Ratios - Market ratios measure investor response to owning a company's stock and also the cost of issuing stock.
a. P/E Ratio – Price to Earnings Ratio - is a measure of the price paid for a share relative to the annual income or profit earned by the firm per share. A higher P/E ratio means that investors are paying more for each unit of income. It is a valuation ratio included in other financial ratios.
b. Payout Ratio - Dividend payout ratio is the fraction of net income a firm pays to its stockholders in dividends. Dividend payout ratio= Dividends/ Net Income for the same period. The part of the earnings not paid to investors is left for investment to provide for future earnings growth. Investors seeking high current income and limited capital growth prefer companies with high Dividend payout ratio. However investors seeking capital growth may prefer lower payout ratio because capital gains are taxed at a lower rate. High growth firms in early life generally have low or zero payout ratios. In my case, the dividend policy of GOOGLE states – “We have never declared or paid any cash dividend on our common stock. We currently intend to retain any future earnings and do...
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