Question

The four key users of financial statements are owners/managers, lenders, investors and governments. These users rely on financial statements to evaluate a company’s past financial performance as indicators in areas of profitability, liquidity, leverage, and efficiency; to create benchmarking matrixes; and to support future decision-making.

Choose two companies in the same industry whose financial statements are available online. Complete several financial ratios for each company and compare them. Share your analysis and answer the following questions in a minimum of 175 words:

• What did your analysis tell you about these companies?
• What sorts of decisions would this analysis help you make; such as buying stocks, considering accepting an employment offer,etc.?

Answer 1

I have taken two companies in the automobile industry as examples (Maruti Suzuki and TATA Motors) various financial ratios and what they indicate is as follows.

Profitability Ratios:

Net Profit Margin: TATA - 2.91 Suzuki - 8.71

After all kinds of expenses, Suzuki is able to earn 9% of total revenue as net profit while TATA 3%. This higher NPM % indicates that Suzuki's expenses are less and operationally it is strong.

Return on Equity: TATA - 9.11 Suzuki - 16.25

Out of every dollar invested by a shareholder company is able to make $9 and $16 of profit by TATA and Suzuki respectively. so when I was a shareholder invested $100 in both companies TATA made $9 and Suzuki made $16 from my $100. which is performing better here? Yes, you are correct Suzuki.

Liquidity Ratios:

Current Ratio: TATA - 0.58 Suzuki - 0.87

Out of every dollar that both companies owe, TATA has 60 cents and Suzuki has 90 cents. so clearly Suzuki is can easily meet its short term obligations because it has more liquidity in hand than TATA.

Quick Ratio: TATA - 0.37 Suzuki - 0.64

If both companies need money to meet it's short term obligations TATA can quickly have 40 cents and Suzuki can have 60 cents for every dollar of obligation. These quick convertibles are generally Cash in hand or Money at the bank. so since Suzuki can have 60 cents quickly it doesn't have to worry about meeting any kind of short obligations so Suzuki's performance is better.

Leverage Ratio:

Total Debt/Equity: TATA - 0.79 Suzuki - 0

There are 80 cents of debt for every dollar of equity 80% debt is definitely not good for any company if company is not able to make enough profits it will not able to make interest payments and can go bankrupt. here Suzuki has zero debt which is excellent it doesn't have to spend any money in interest payment which will increase the profitability ratio.

Efficiency Ratio:

Expenses/Revenue: TATA - 89% Suzuki - 86%

TATA's expenses are 89% that of revenues and Suzuki's 86% this pretty close but still TATA's expenses are little higher than Suzuki.

Overall Suzuki's performance is better than TATA so investing in Suzuki is gives better results in long run as Suzuki's profits are much higher with no debt in hand Suzuki is also able to meet it's short term obligations without any problem. so working for a company that is performing in the industry also gives great exposure as they spend more on R&D to come up with the best vehicles in the market so Suzuki is suggested here.