Financial ratio analysis

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FINANCIAL RATIO ANALYSIS.

Liquidity, Profitability, Asset management and Leverage

(2011 - 2012 - 2013) years

Overview

When computing financial ratios and when doing other financial statement analysis always keep in mind that the financial statements reflect the accounting principles. This means assets are generally not reported at their current value. It is also likely that many brand names and unique product lines will not be included among the assets reported on the balance sheet, even though they may be the most valuable of all the items owned by a company.

These examples are signals that financial ratios and financial statement analysis have limitations. It is also important to realize that an impressive financial ratio in one industry might be viewed as less than impressive in a different industry.

This massive data overload could seem staggering. Luckily, there are many well-tested ratios out there that make the task a bit less daunting. Comparative ratio analysis helps us identify and quantify our company's strengths and weaknesses, evaluate its financial position, and understand the risks we may be taking.

As with any other form of analysis, comparative ratio techniques aren't definitive and their results shouldn't be viewed as gospel. Many off-the-balance-sheet factors can play a role in the success or failure of a company. But, when used in concert with various other business evaluation processes, comparative ratios are invaluable.

This discussion contains descriptions and examples of the eight major types of ratios used in financial analysis between companies Ford and Toyota Motors Companies: Income, Profitability, Liquidity, Working Capital, Bankruptcy, Long-Term Analysis, Coverage, and Leverage. Our explanation of financial ratios and financial statement analysis is organized as follows:

· Balance Sheet

· Income Statement

· Statement of Cash Flows

Outline

1. Purposes and Considerations of Ratios and Ratio Analysis

2. Financial Ratio Analysis: Intel Company

3. Financial Ratio Analysis: IBM Company

4. Financial compare statement of the financial ratios for 2013 : Intel and IBM Companies

Resources

1. Purposes and Considerations of Ratios and Ratio Analysis

Ratios are highly important profit tools in financial analysis that help financial analysts implement plans that improve profitability, liquidity, financial structure, reordering, leverage, and interest coverage. Although ratios report mostly on past performances, they can be predictive too, and provide lead indications of potential problem areas.

Ratio analysis is primarily used to compare a company's financial figures over a period of time, a method sometimes called trend analysis. Through trend analysis, we can identify trends, good and bad, and adjust your business practices accordingly. We can also see how your ratios stack up against other businesses, both in and out of your industry.

There are several considerations you must be aware of when comparing ratios from one financial period to another or when comparing the financial ratios of two or more companies.

· If we are making a comparative analysis of a company's financial statements over a certain period of time, make an appropriate allowance for any changes in accounting policies that occurred during the same time span.

· When comparing Intel business with IBM, one in IT industry, allow us for any material differences in accounting policies between companies and industry norms.

· When comparing ratios from various fiscal periods or companies, inquire about the types of accounting policies used. Different accounting methods can result in a wide variety of reported figures.

· Determine whether ratios were calculated before or after adjustments were made to the balance sheet or income statement, such as non-recurring items and inventory or pro forma adjustments. In many cases, these adjustments can significantly affect the ratios.

· Carefully examine any departures from industry norms.

2. Financial Ratio Analysis: Intel Company

In order to commence financial ratio analysis, every analytic should know a general information about the company.

Intel on NASDAQ

Intel's common stock trades on The NASDAQ Global Select Market* under the symbol INTC.

Independent Registered Public Accounting Firm

Ernst & Young LLP, San Jose, California, USA.

The Intel® Brand

The Intel® brand is consistently ranked as one of the most recognizable and valuable brands in the world. It represents our commitment to moving technology forward to connect and enrich the life of every person on earth. As the world leader in computing innovation, Intel designs and builds the essential technologies that serve as the foundation for the world's computing devices.

Corporate responsibility and integrated value.

As a global technology and business leader, we are committed to doing the right things, the right way. Our corporate responsibility activities create value for Intel by helping to mitigate risk, save costs, protect our brand value, and develop new market opportunities. In addition to the corporate responsibility content included in this Annual Report, more detailed information is available in Intel's annual Corporate Responsibility Report. Prepared using the Global Reporting Initiative's Sustainability Reporting Guidelines, the report outlines our strategic priorities and performance on a range of environmental, social, and governance factors, including workplace practices, community engagement, and supply chain responsibility.

Caring for our people.

One of the six Intel Values is “Great Place to Work,” which reinforces the strategic importance of investing in our people. We support this value by cultivating a safe, respectful, and ethical work environment that enables employees to thrive both on the job and in their communities. In 2013, Intel was again named to Fortune magazine's Best Companies to Work For list.

Caring for the planet.

Intel is a recognized leader in sustainability for the ways we work to minimize the environmental impacts of our operations and design products that are increasingly energy efficient. In 2013, for the sixth year in a row, Intel was the largest voluntary purchaser of green power according to the U.S. Environmental Protection Agency.

Inspiring the next generation.

In line with the vision to “connect and enrich the life of every person on Earth,” Intel® technologies, products, and social impact programs are helping to empower people to create positive change. From fostering entrepreneurship and advancing education in communities around the world, to expanding opportunities for girls and women, we are committed to creating shared value for Intel, our stakeholders, and society.

Governance and ethics.

Intel is committed to the highest standards of business ethics and corporate governance. Intel is a member of the United Nations Global Compact LEAD program and has in place Human Rights Principles to reinforce our commitment to corporate citizenship. It is also committed to promoting effective governance and responsibility in our supply chain, and working collaboratively with others in our industry through the Electronic Industry Citizenship Coalition.

In this short statement we have looked through periods from 2011 - 2013, financial ratio cost of Intel and IBM companies, which had been already based on financial statements: income statement, balance sheet and cash flow.

Looking through financial information of Intel in the field profitability ratio we may note that the total revenue of Ford is being increased, but gross margin is being decreased. This moment show us that the net profit of the company is getting down in average about 13% during three years from 2011 till 2013.

The main factors which influenced to this situation are:

- Decreasing income of peoples;

- Increasing rate of unemployment;

- Innovations in the field IT;

- Government policy in the field military

Two frequently - used liquidity ratios are the current ratio (or working capital) and the quick ratio.

Current ratio - average growth: 2,31%

Quick ratio - average growth: 1,46

ROE is at the stable growth, nearly it is decreased from 27,15 till 17,58, which says us that total sell of products is average . Cause for publicly traded companies, the relationship of earnings to equity or Return on Equity is of prime importance since management must provide a return for the money invested by shareholders. Return on Equity is a measure of how well management has used the capital invested by shareholders. Return on Equity tells us the percent returned for each dollar (or other monetary unit) invested by shareholders.

Return on Equity has three ratio components. The three ratios that make up Return on Equity for Ford Company are:

Profit Margin = 20,95%

Asset Turnover = 0,70%

Financial Leverage = 1,60%

We can move down to a more detail analysis with ratios of Intel Company. Four common groups of detail ratios are: Liquidity, Asset Management, Profitability and Leverage. All these ratios we may see below mentioned table with indicating charts.

From Liquidity Ratios we can conclude that financial situation of Intel meet its obligations over the long-run. Higher liquidity levels indicate that company can easily meet their current obligations.

(See analyze diagram).

3. Financial Ratio Analysis: IBM Company

According to the latest news, IBM (NYSE: IBM) announced it has been named a Leader in the IDC MarketScape: Worldwide Mobile Application Development and Testing Services 2014 Vendor Assessment.1

Following an evaluation of 19 service providers against more than 100 criteria, IBM was recognized in the "Leaders" category for its performance across business services capabilities, sales/distribution structure, employee management, customer satisfaction criteria and overall project management capabilities. In addition, IBM was credited for the scale of its user experience and creative design skills, through IBM Interactive Experience, the largest digital agency in the world, according to Ad Age. financial liquidity depreciation asset

Today's announcement reinforces IBM's commitment to helping organizations speed their mobile enterprise transformation and eliminate barriers to adoption. The IBM MobileFirst portfolio features key capabilities in analytics, data, security and cloud to deliver innovative solutions. These solutions empower employees to make more effective decisions and enhance customer interactions; help developers create, deploy, manage and secure mobile apps, on-premise or in the cloud; and enable organizations to manage and secure mobile devices, applications, content and transactions with confidence.

The report emphasized IBM's mobile application development and testing services strengths across traditional technologies, native mobile device technologies and cloud platforms. Other highlights included clients' high regard for IBM's technical expertise in mobile, global scale and flexibility to work with the client's application development methodology, whether the client used an agile, waterfall or hybrid approach. Also noted was IBM's strong industry partnerships, customer service and overall project management as key assets they valued when working with IBM.

"This report is further recognition of IBM's unmatched mobile enterprise consulting leadership” said Paul Papas, global leader, IBM Interactive Experience. “IBM's trusted mobile experts understand our clients' business, create strategies that align with industry and user expectations, and execute with scale and speed through our unique combination of design, strategy, analytics and enterprise mobile skills.”

In late March, IDC also published a MarketScape on Worldwide Mobile Application Development, Testing, Management and Infrastructure Services2 in which IBM was also ranked a Leader. This new report is an adjunct of that work, focusing on application development and testing services only.

About IBM Mobile First

IBM's 6,000 mobile experts have been at the forefront of mobile enterprise innovation. IBM has secured more than 4,300 patents in mobile, social and security, which have been incorporated into IBM Mobile First solutions that enable enterprise clients to radically streamline and accelerate mobile adoption, help organizations engage more people and capture new markets. Through IBM's partnership with Apple, the two organizations are transforming enterprise mobility with a new class of industry specific business apps.

About IDC Market

IDC Market vendor analysis model is designed to provide an overview of the competitive fitness of ICT (information and communications technology) suppliers in a given market. The research methodology utilizes a rigorous scoring methodology based on both qualitative and quantitative criteria that results in a single graphical illustration of each vendor's position within a given market. IDC Market provides a clear framework in which the product and service offerings, capabilities and strategies, and current and future market success factors of IT and telecommunications vendors can be meaningfully compared. The framework also provides technology buyers with a 360-degree assessment of the strengths and weaknesses of current and prospective vendors.

Obviously, an increase in sales will necessitate more operating assets at some point (sales may rise without additional investment within a given range, however); conversely, an inadequate sales volume may call for reduced investment. Turnover of Total Operating Assets of IBM or sales to investment in total operating assets tracks over-investment in operating assets. As we consider 2013 fiscal year:

Total operating assets : 40,85%;

Asset turn over: 0,75%

While liquidity ratios are most helpful for short-term creditors/suppliers and bankers, they are also important to financial managers who must meet obligations to suppliers of credit and various government agencies of IBM. A complete liquidity ratio analysis show us stable situation in the financial position of the company, which net margin increased till 4,36% as well as gross margin indicating straightly 18,51%.

Popular since the turn of the century, this test of solvency balances company's current assets against current liabilities. The current ratio will disclose balance sheet changes that net working capital will not. Current ratio: 1.72% and Quick ratio: 0.88% for 2013 year.

Also known as the "acid test," this ratio specifies whether your current assets that could be quickly converted into cash are sufficient to cover current liabilities. Until recently, a Current Ratio of 2:2 was considered standard. A firm that had additional sufficient quick assets available to creditors was believed to be in sound financial condition, which is about total current assets: 38,85%. The Quick Ratio assumes that all assets are of equal liquidity. Receivables are one step closer to liquidity than inventory. Receivables turn over 18,5% - indicate stable development of IBM within three years from 2011 till 2013

Business owners of IBM who have filed for bankruptcy say they wish they had seen some warning signs earlier on in their company's upward spiral into stable development. From Financial Ratios we can conclude that financial situation of IBM meet its ambitions of employees over the long-run. Higher liquidity levels indicate that company can easily meet their current obligations. (See analyze diagram). In this state we can use several types of ratios to monitor liquidity of these two companies.

4. Financial compare statement of the financial ratios for 2013 : Intel and IBM Companies

The balance sheet reports company's assets Intel and IBM: liabilities, and stockholders' equity as of a specific date, such as December 31, 2013, show us cost principle and the monetary unit assumption will limit the assets reported on the balance sheet. Assets will be reported: 23% against 25%

This means that companies' creative and effective financial management team will stay outstanding reputation, its unique product lines, and brand names.

As you may surmise, these items are often the most valuable of all the things owned by the company. (Brand names purchased from another company will be recorded in the company's accounting records at their cost.)

Companies' matching principle will result in assets such as buildings, equipment, furnishings, fixtures, vehicles, etc. being reported at amounts less than cost. The reason is these assets are depreciated. Depreciation reduces an asset's book value each year and the amount of the reduction is reported as Depreciation Expense on the income statement.

While depreciation is reducing the book value of certain assets over their useful lives, the current value (or fair market value) of these assets may actually be increasing. (It is also possible that the current value of some assets—such as computers—may be decreasing faster than the book value.). In our compare analyze we see only average 4,5 growth of gross income.

Current assets such as Cash, Accounts Receivable, Inventory, Supplies, Prepaid Insurance, etc. usually have current values that are close to the amounts reported on the balance sheet.

Current liabilities such as Notes Payable (due within one year), Accounts Payable, Wages Payable, Interest Payable, Unearned Revenues, etc. are also likely to have current values that are close to the amounts reported on the balance sheet.

Long-term liabilities such as Notes Payable (not due within one year) or Bonds Payable (not maturing within one year) will often have current values that differ from the amounts reported on the balance sheet.

Stockholders' equity is the book value of the company. It is the difference between the reported amount of assets and the reported amount of liabilities. For the reasons mentioned above, the reported amount of stockholders' equity will therefore be different from the current or market value of the company.

This technique is quite useful when you are comparing your business to other businesses or to averages from an entire industry, because differences in size are neutralized by reducing all figures to common-size ratios. Industry statistics are frequently published in common-size form.

When comparing company with industry figures, make sure that the financial data for each company reflect comparable price levels, and that it was developed using comparable accounting methods, classification procedures, and valuation bases.

Such comparisons should be limited to companies engaged in similar business activities. When the financial policies of two companies differ, these differences should be recognized in the evaluation of comparative reports. For example, one company leases its properties while the other purchases such items; one company finances its operations using long-term borrowing while the other relies primarily on funds supplied by stockholders and by earnings. Financial statements for two companies under these circumstances are not wholly comparable. See table.

Considering thoroughly ratio data of two companies Gross margin of Intel is identical growth: 2 % .

In conclusion, for 2013 year, financial situation for both companies was upward growth, which indicate receivables turnover 1,85 (Intel) against IBM (1,84).

Resources

1. Peter Atrill and Eddie McLaney, "Accounting and Finance for Non-Specialists" (Prentice Hall, 1997);

2. Leopold Bernstein, John Wild, "Analysis of Financial Statements" (McGraw-Hill, 2000);

3. Daniel L. Jensen, "Advanced Accounting" (McGraw-Hill College Publishing, 1997);

4. Martin Mellman et. al., "Accounting for Effective Decision Making" (Irwin Professional Press, 1994);

5. Eric Press, "Analyzing Financial Statements" (Lebahar-Friedman, 1999);

6. 1 - IDC MarketScape: Worldwide Mobile Application Development and Testing Services 2014 Vendor Assessment (IDC # #252565, December 2014)

7. 2 - IDC MarketScape: Worldwide Mobile Application Development, Testing, Management, and Infrastructure Services 2014 Vendor Assessment (IDC #247480, March 2014)

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