Financial Ratio Analysis of two companies

Topics: Balance sheet, Financial ratio, Financial ratios Pages: 19 (3077 words) Published: June 20, 2005

Table of Contents3




Profitability of Sample Company5

Sample Company ROI for 20005

Sample Company ROI for 20015

Stock Performance6

Activity of Sample Company7

Leverage of Sample Company7

Liquidity of Sample Company7

What Is Necessary to Assess the Company?8

What Ratios Have the Most Value?10

What Other Factors, Beyond Ratios, Need To Be Considered?10

How Would Your Assessment Criteria Change If The Company In a Different Industry12

Changes in Assessment Method12



Appendix A - Sample Company's Financial Statements from 1999 - 200115

Appendix B - Financial Ratio Analysis of Sample Company19


This research paper will evaluate Sample Company using review standard financial ratio analysis techniques and assess its potential as a good investment. This is written in the form of a memo to the CEO of an Alabama-based firm, looking for sound financial advice with regards to whether of not buying stock in Sample Company is a sound investment.


This research paper will reveal the financial analysis techniques used to evaluate the financial performance of the Sample Company, and evaluate the company's worthiness as an investment. The paper is divided into three sections. The first section is the memo, which is the main body of the paper. The second section, Appendix A, includes as a reference contains each of the sets of the four financial statements that show Sample Company's performance from 1999 to 2001. The third section, Appendix B, contains the actual financial ratio analysis techniques, showing the company's performance in 2000 and 2001, the percent change in performance between these years, a short description of the meaning of each ratio, as well as a short assessment of the company's change in performance between 2000 and 2001. Using these appendices to support the financial analysis ideas expressed in the memo, the reader should feel that they have a complete set of facts to substantiate these ideas and provide a reference for them.


Date:July 1, 2003

To:Randall K. Black, CEO

Absolutely Alabama Investments

From:William F. Slater, III, Consultant

Slater Technologies

Subject:Financial Analysis Using Ratio Analysis and Recommendation

Dear Randall:

Thank you for the opportunity to review Sample Company's financial statements and make this ratio analysis, as well as some recommendations about possible investment in this company.

Using financial statements from 1999, 2000, and 2001, along with standard financial ratio analysis, I have been able to develop what I believe is a clear picture of this company's financial performance. Note that the financial analysis was done using the financial report data from publicly available financial statements for the years 2000 and 2001. I have included these statements for your review in Appendix A

Appendix B contains other measures of Sample Company's financial performance, as expressed in standard financial ratio analysis techniques using figures from the financial reports in Appendix A.

Profitability of Sample Company

First, let's look at the Return on Investment (ROI) for 2000 and 2001, using the Dupont Model, which is margin times turnover. Margin is net income divided by the sales, and turnover is sales / average total assets (Marshall, 2002).

Sample Company ROI for 2000


OPERATING INCOME =Operating IncomexSales

AVERAGE TOTAL ASSETSSalesAverage Total Assets

Input: 498 =498 x8,251

7,196 8,251 7,196

Result: 6.9% =6.0%x1.15

Sample Company ROI for 2001


OPERATING INCOME =Operating IncomexSales

AVERAGE TOTAL ASSETSSalesAverage Total Assets

Input: 924 =924 x10,359

8,659 10,359 8,659

Result: 10.7% =8.9%x1.20

At over 55.1%, the increase in ROI between 2000 and 2001 is remarkable and...

References: Memorandum
Date:July 1, 2003
Activity of Sample Company
The activity ratios measure the company 's management of asset levels and sales (Marshall, 2002)
Leverage of Sample Company
Leverage is the use of debt to finance company assets (Marshall, 2002)
Liquidity of Sample Company
The liquidity of a company is the ability to meet its loan obligations as it relates to its current assets and its current liabilities (Marshall, 2002)
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