Week 1 Discussion 1

Topics: Investment, Financial ratio, Economics Pages: 2 (686 words) Published: August 22, 2013
From the e-Activity, evaluate at least two companies’ financial statements that have received a negative rating from one of the financial rating agencies. Determine which financial ratios most likely impacted the rating decision. Compare and contrast at least two financial ratios that support the rating agency's claims. Speculate on how the ratios are likely to change considering the economic environment in which it operates. Support your position. The two companies that I choose for this discussion are the American Express, Inc. and the General Electric Company. Both of them received negative rating from the Thomson Reuters Stockreport + and both of them is under the -2 category. As I research on the ratios that these rating companies might use, I discover that they love to use the leverage ratios as an indicator. Take American Express and the General Electric as an example. Both of them carry more than 400% Debt to Common Equity while the Long Term Debt Percent to Common Equity are both more than 250% which consider very high in comparing to those obtain positive rating like Boeing, whose total Debt percentage to Common Equity is only 201.05%! Other than these leverage ratios, the assets per employee ratio seem to be another key factor to determine the ranking. Company has positive rating like Boeing has assets per employee ratio at $397,262.38 per employee while both GE and American Express have over 2 million per employee! If a company’s debt to equity ratio is more than 400%, it means that the company relies heavily on debt than equity. It is true that interest expense is tax deductible and which will help to improve the net income as a result of this benefit. However, this ratio will tell the investor that the company might get into cash problem if the growth in sales is slow plus the collection rate is low. In addition, when the assets to employee ratio is over million, it tells the investor that the company is inefficient in generate profit....
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