Financial Ratios Comparison

Topics: Financial ratios, Generally Accepted Accounting Principles, Financial ratio Pages: 6 (1893 words) Published: March 13, 2011
The companies’ financial ratios can be compared with the ratios of other equivalent companies between business sectors at one point of time. These comparisons provide explanations on the relative financial status and performance of the company compared to the relative performance of its competitors. Comparisons are usually made with other companies in the same business sector and the benchmark is assumed to be the suitable value for a company. The assumption here is for the companies in the same business sector to have the almost identical financial ratios. If the ratio of a company shows a significant difference with the standard ratio, then further investigation must be done to find the cause of that difference. For evaluation, a company’s financial ratio is compared to the competitors one by one, and then classified as satisfactory or unsatisfactory, depending upon the direction and how far it has diverted from standard. The table below summarizes the comparison and evaluation of ratio analysis for the companies between business sectors:

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a. Liquidity
The company’s achievement in current ratio and quick ratio are much different compared with the industry. Overall, the company’s liquidity is rather satisfactory. b. Asset Management
The company’s inventory management is quite satisfactory. The company might face problems with its account receivables as the collection period for the company is higher compared to the industry. Therefore, attention has to be given to the management of account receivables. c. Leverage

The level of the company’s debts is higher than that of the industry average. However, the ability of the company to pay interests is better compared to the industry. d. Profitability
Profitability, relative to the investors (as seen in the return on asset and return on equity ratios) of the company is better compared to the industry. This is the same with the gross profit margin and net profit margin. e. Market Value

The company’s shares were sold at the higher price earnings ratio than the industry. This is the same for dividends yield ratio which is smaller compared with the industry.

2.7.2 Current Ratio
Current ratio measures the ability of the company to fulfil its long-term loans using its current assets. The higher the value of this ratio, the better the liquidity status of the company. This shows that the company is able to settle short-term debts using its current assets. 2.7.3 Quick Ratio

Quick ratio measures the ability of the company to pay its short-term loans quickly. Quick ratio is a liquidity test that is more stringent compared to the net working capital and current ratio. This is because quick ratio only takes into consideration the cash and assets that can easily be converted into cash. Inventory is not included with the other liquid assets due to the longer period for the inventory to be converted into cash. Expenses prepaid are also not included as it cannot be converted into cash. Therefore, it cannot be used to settle the current liabilities. Quick ratio is obtained when the most liquid current assets (cash, marketable securities and account receivables) are divided with current liabilities. The higher the quick asset ratio compared with the current liabilities, the better the liquidity level of the company to settle its short-term loans quickly 2.8.1 Account Receivable Turnover

Account receivable turnover measures the ability of the company to collect debts from its customers. It provides the total of account receivables collected throughout the year. The higher the ratio, the better it is an indication that: * The company can collect debts from its customers quickly; * The company has low bad debts; and

* The company can use the funds for the next investments. Account receivable turnover is the net credit sales revenue (if unavailable, use the total sales) divided by the account receivables...
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