Financial essay example


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Topic: Ratio Analysis Type: Essay Subject: Accounting and Finance
Academic Level: Undergraduate Style: APA Language: English (U.S)
Number of pages: 3 (double spaced, Times New Roman, Font 12)
Number of sources: 3

Published in: Economy & Finance
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Financial essay example

  1. 1. Running head: Ratio Analysis Task details Using academic sources, choose a publicly traded firm, and use its data from within the past three (3) years to identify financial ratios, precisely; the profit margin, debt to asset ratio, price-earnings (PE) ratio, inventory turnover, current ratio, and the times interest earned. Analyze financial trends of that firm and evaluate whether it realize success throughout the next five (5) years, or whether there appear to be challenges that will inhibit its growth. Provide a rationale for your response. As a manager of the chosen firm, summarize the major steps towards improving the firm or to maintain its prevailing financial success. Give a rationale behind the success of your approach
  2. 2. Ratio analysis !2 GE Healthcare Financial Analysis The GE Healthcare company has been in operation for more than a century. It operates globally in more than 170 countries with its headquarters in the U.S. It entity provides financial and infrastructure services worldwide. The company’s water and power segments offer steam, gas and aero-derivative generators, turbines, combined cycle systems, and other related services. It employs over 100,000 people across the globe under its Chief Executive Officer Jeffrey R. Imemelt who has been the firm’s director for the last 14 years. Analyzing this company’s financial status will assist investors in knowing the firm's financial position, which is essential for their investment decision-making (Axel, 2012). The total revenue for the GE Company for the year 2013 was $146,045 million while the cost of goods sold was $77,141 million to give a gross profit margin of $68,904 million. The net profit margin after taxes and operating expenses was 8.94% of the total revenue. From a three-year financial analysis, ranging from 2011 to 2013, GE Healthcare has been making significant returns, an implication that the company has been effectively and efficiently managing its expenses to increase profitability (Weygandt, 2005). Also, the ability of the company to meet its short and long-term obligations has been good, implying that the company is in a good position to meet its debt obligations. This is clearly depicted by the current, quick and long term debt ratios in Appendix I. The comparison of returns on equity and assets for the three years, as from 2011 to 2013 shows that GE Company gained better returns. This makes this company a viable investment opportunity.
  3. 3. Ratio analysis !3 According to Axel (2012), asset utilization ratio measures how the management used an asset to generate revenue. For the last three years, GE Company has been managing efficiently its assets in the generation of income as depicted by inventory turnover and account receivable turnover in Appendix I. The trend in the inventory turnover has been declining for the last three years. As such, the management should find out the reasons behind this reduction for corrective measures to be implemented. The EPS of the company in 2013 was 1.27, and the dividend payout was 53.7%. The trend in dividend payout and the price-earnings ratio has been increasing steadily for the last three years, showing that the firm has been paying substantial dividends to its shareholders (Weygandt, 2005). The EPS of GE Company has been positive throughout the three years. This is attributed to the positive returns it has been making. Besides, times interest earned for the company has been increasing progressively from 2.38 in 2011 to 2.60 in 2013, suggesting how GE Healthcare has been gaining from the interest that was being paid for the cost of capital. From the company’s ratio analysis in Appendix I, it is clear GE Healthcare has had better performance in terms of profitability, liquidity, asset utilization and market measure. Based on this data, the company’s investors, both the existing ones and those joining the firm are likely to get higher returns. This makes it clear that the company will continue experiencing better financial performance for the next five years as shown by a number of ratios, including: the profitability ratios, return on assets and equity, which have been growing since 2011 with the profit margin changing slightly, even though this margin is still high. The current and acid test ratios have also had a significant increment, an implication that the company will continue to manage well its long and short term obligations
  4. 4. Ratio analysis !4 As the manager of GE Company, it is worth defining the products and markets that describe the domain of the company (Boulton, 2004). Once the business segment that the company is operating has been understood, it will be easier to serve it effeciently. Secondly, it is essential going an extra mile to know some of the segment’s key players, including; customers, suppliers, and competitors. Thirdly, identifying the requirement and trends that determine the critical success factors for the company is vital (Boulton, 2004). These factors include competitive factors which must be met, customer requirements, and regulatory standards in the business, technical requirements, and the resource requirement in order to implement competitive strategies. As the manager of the company, understanding the market in which the company is operating in will ensure that better and informed decisions are made. This will ensure that an investor gets better returns. By fully understanding the three main players in the industry in which the company is operating, it becomes clear that the company will meet the needs of these players, which in most cases, determine the future success of the company. For instance, if the company is offering quality services and products to the customers, the market share will be able to grow progressively, thereby, increase sales, which translates to an increase in the firm’s profitability.
  5. 5. Ratio analysis !5 References Axel, T. (2012). Ratio Analysis Fundamentals: How seventeen Financial Ratios Can Allow You to Analyze Any Business on the Planet. Sydney: Boulton, R. (2004). The strategic analysis model. Business Journal, 1-10. Weygandt, J. (2005). Hospitality Financial Accounting. New York: John Willey & Sons. Appendices Appendix I: Financial analysis of GE Healthcare Ratios 2013 2012 2011 Liquidity Ratios GE Ltd GE Ltd GE Ltd Cash ratio 1.16 1.19 1.46 Quick Ratio 2.42 2.26 2.02 Current ratio 2.53 2.34 2.08 Long-term debt ratios Debt equity ratio 1.86 2.07 2.25 Times interest earned 2.60 2.39 2.38 Profitability Ratios
  6. 6. Ratio analysis !6 Source: Profit margin (%) 8.94 9.26 8.91 Return on assets (%) 1.97 1.95 1.79 Return on equity (%) 10.3 11.39 11.15 Asset utilization Ratios Inventory turnover 4.72 5.1 5.39 Account receivable 6.81 7.2 6.25 Market measure Ratios Price earnings ratio 12.98 11.8 11.01 Earnings per share 1.27 1.29 1.23 Dividend payout (%) 53.7 50.4 49.6
  7. 7. Ratio analysis !7 Our links