Economics Homework Help

Financial analysis can be defined as the process of assessing the financial condition of a firm. It can be very useful in understanding the financial position of a company. There are varieties of ratios that can be used for this purpose but each has it benefits and limitations.

Select two ratios you think are the most valuable when trying to understand the financial condition of a company and explain why you have selected them. Then use those ratios to assess two publicly traded US companies listed on the NASDAQ stock market.

What do these ratios tell you about how investors assess the future prospects of these companies?

For your discussion post, your first step is to summarize the article in two paragraphs, describing what you think are the most important points made by the authors (remember to use citations where appropriate). For the second step, include the reference listing with a hyperlink to the article. Do not copy the article into your post and limit your summary to two paragraphs. Let your instructor know if you have any questions and enjoy your search.

Reply:

First:

I chose current ratio and net profit margin ratio. Current ratios provide insights on the ability a company has to repay short term obligations. Net profit margin provides nighties on how much profit a company make from sales.

Netflix

2016

2017

2018

2019

Liquidity

current ratio

1.25

1.40

1.49

0.90

Profitability

net profit margin

4.78%

7.67%

9.26%

10.43%

Disney

2016

2017

2018

2019

Liquidity

current ratio

0.86

0.87

1.00

0.80

Profitability

net profit margin

16.29%

19.61%

18.46%

13.80%

Above are the ratio of Netflix and Walt Disney. From the ratios, we assess that Netflix has better liquidity than Disney. On the other hand, Walt Disney is far more profitable than Netflix, with more than USD 15 profit for every USD 100 sales. So current ratio of Netflix is higher than Disney which keeps Netflix to pay obligation and dues. The net profit margin of Disney is greater than Netflix which tells how much Disney generate as a percentage of revenue.

In Saudi Arabia as an example Zain KSA, reported a net profit after Zakat 2.28% in the first half of 2021 with liquidity current ratio of 0.37%. which sasses that Zain has liquidity to pay short term obligation and due however, it required to keep more liquidity, and still generating profit as shown above.

Reference:

https://www.wsj.com/market-data/quotes/SA/7030/financials

Second:

Yusoff (2017) discussed the importance of managers ensuring that companies remain solvent and liquid. In an article titled The effect of liquidity and solvency on profitability: The case of public-listed consumer product companies in Malaysia, the author explained the importance of these two metrics for the realization of the long-term good of the company. The importance of the liquidity ratio relates to the fact that they gauge a company’s ability to meet short-term financial obligations. Companies that have poor liquidity are likely to run into trouble with suppliers and other creditors. The author noted that while Malaysian companies have prioritized profitability, the need for ensuring liquidity cannot be overemphasized.

Yusoff (2017) argued that businesses can remain profitable for a long time yet run into liquidity issues. Although managers are keen to sustain profitability, the importance of profits can be diluted by illiquidity. For companies doing business in Saudi Arabia, this means that although such companies can make profits, the risk of running bankrupt because of illiquidity cannot be overestimated. Corporate managers should ensure that debt and liquidity structures are balanced to maximize shareholder value. An optimal structure should limit interest expenses while allowing for healthy working capital throughout the business cycle. The author notes that a company is unlikely to run into financial distress when these elements are observed.

Kroger Company 2021 Annual Results

Current ratio = current assets/ current liabilities

= 12,503/15,366

= 0.8: 1

Debt-to-Equity Ratio = Total Debt/Total Equity

= 12,502/ 9,550

= 1.3: 1

Source: Kroger Form 10-K., 2021).

Coca-Cola Company 2021 Annual Results

Current ratio = current assets/ current liabilities

= 19,240/14,601

= 1.3: 1

Debt-to-Equity Ratio = Total Debt/Total Equity

= (40,125 + 2,183)/ 21,284

= 42,308/21,284

= 1.99: 1

Source: Coca-Cola Form 10-K., 2021).

From the analysis above, Kroger is performing poorly regarding both liquidity and solvency. The rule of thumb requires the current ratio to be 2:1, but Kroger’s current liabilities are more than its current assets meaning that it cannot pay its suppliers. Furthermore, the company’s operations are overly funded by debt, increasing the risk of bankruptcy. Coca-Cola is doing better than Kroger, with a better current ratio. This means that it can meet its short-term obligations, albeit by narrow margins. Like Kroger, Coca-Cola is also highly leveraged, putting its solvency to question.

References

Form 10-K. (2021). Coca-Cola Company. U.S Securities and Exchange Commission. https://investors.coca-colacompany.com/filings-reports/annual-filings-10-k/content/0000021344-21-000008/0000021344-21-000008.pdf

Form 10-K. (2021). The Kroger Company. U.S Securities and Exchange Commission. https://d18rn0p25nwr6d.cloudfront.net/CIK-00000568…

Yusoff, H. B. M. (2017). The effect of liquidity and solvency on profitability: The case of public-listed consumer product companies in Malaysia. University Tun Hussein Onn Malaysia. https://core.ac.uk/download/pdf/154808657.pdf