Assignment: Finance and Operations: This week we look at finance and operations,

Question

Assignment: Finance and Operations: This week we look at finance and operations, and apply a bit of quantitative analysis to the effort.

Your assignment this week is to analyze current financial ratios for a given business. APA formatting required.

1. Think of a specific business you find interesting, i.e. Apple, UTC, Southwest Airlines, etc.

2. Search the web for that business’ “Financial Statement”. (You will find many hits for the data.)

3. Select the “http://www.morningstar.com/” site offering your company’s financial statement.

4. You will now see a number of financial ratios for your company. Below is an example for Apple: http://financials.morningstar.com/ratios/r.html?t=AAPL

5. Now, define the following ratios, note the ratio for your business, and explain what the ratio means for the business moving forward:

a) Return on Assets

b) Return on Equity

c) Return on Capital

d) Gross Margin

e) SG&A Margin

f) Current Ratio

g) Quick Ratio

h) Total Debt/Equity

i) Total Revenue

j) Gross Profit

Here are some additional sources as well. You can always do a quick search on Google using the appropriate keywords in your search.

Apple (Return on Assets):

https://ycharts.com/companies/AAPL/return_on_assets

https://www.stock-analysis-on.net/NASDAQ/Company/Apple-Inc/Ratios/Profitability/Quarterly-Data#Ratios-Summary

Explanation / Answer

The company that I have selected is Apple.

a. Return on assets: This ratio is a profitability ratio that measures net income that is produced by per dollar of assets used by a company during a financial year. It measures how efficiently a company manages its assets to produce profit. ROA = Net income/average total assets.

For Apple ROA for 2017-09 stood at 13.87%. Going forward, Apple should look at improving its ROA so as to be able to better utilize its assets to produce higher profits.

b. Return on equity: This is also a profitability ratio. This ratio measures the ability of a company to generate profits from the investments made by its shareholders. ROE = Net income/shareholder’s equity. For Apple ROE for 2017-09 stood at 36.87%. Moving forward for Apple will have to maintain its high ROE to ensure that the management continues to effectively use equity financing.

c. Return on capital: This is also a profitability ratio. This ratio measures the efficiency with which a company is able to generate profits from the capital employed by it. Return on capital = net operating profit/employed capital. For Apple this ratio was 19.86% for 2017-09. This ratio has been declining and going forward Apple will have to increase it in order to be able to raise long term financing.

d. Gross margin: This is also a profitability ratio. This ratio measures how profitably does a company is able to sell its inventory and merchandise. Gross margin ratio = gross margin/net sales. For Apple this ratio stood at 38.47% for 2017-09. Apple will have to keep this ratio high so as to be able to pay for its operating expenses comfortably.

e. SG&A margin: This is also known as EBITDA margin and measures how much of EBITDA is generated per dollar of sales. SG&A margin = (Gross profit – total SG&A expenses)/sales. For Apple this ratio stood at 6.66% for 2017-09. Going forward Apple will have to seek to keep its SG&A expenses lower so that EBITDA (or operating income) as a percentage of sales is high.

f. Current ratio is a liquidity ratio and measures the ability of a company to pay off its short term liabilities with its current assets. Current ratio = current assets/current liabilities. For Apple this ratio stood at 1.28 for 2017-09. Going forward Apple has to ensure a high current ratio so that it has a comfortable liquidity position.

g. Quick ratio is also am liquidity ratio. This ratio measures the ability of a company to pay off its short term liabilities with its quick assets. It is a more stringent measure of liquidity. Quick ratio = (current assets-inventories)/current liabilities. For Apple this ratio stood at 1.09. Going forward Apple has to ensure a high quick ratio so that it has a comfortable liquidity position.

h. Total debt/equity: This is a liquidity ratio that compares a company’s total debt with its total equity. The formula for this ratio = total liabilities/total equity. For Apple this ratio stood at 0.73 for 2017-09. Going forward Apple will have to determine if it wants a higher creditor financing or a higher equity financing.

i. Total revenue is the top-line figure of a company. It is nothing but the total sale earnings. For Apple its revenue was $229,234 million for 20170-09. Going forward the company will seek higher trajectory in its sales revenue.

j. Gross profit is profitability metric and is computed by deducting cost of goods sold from revenues. For Apple gross profit for 2017-09 stood at $88,255 million. Going forward the company would seek higher expansion in its gross profits so as to be able to increase its profitability.

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