Ratio Analysis. Perform a Ratio Analysis of the company you chose (Tesla) based on the ratios found on Exhibit 4. 3 on page 91 of your textbook.
After completing the ratio describe each category and comment on what each type is measuring and what the result is telling you about how the company has performed. Compare and comment on how the company performed when compared to the Industry for the years 2017, 2018, and 2019. The Industry Ratios can be found here: https://www.readyratios.com/
I attached pg 91 of textbook .
SAMPLE ESSAY FOR COSTCO:
Liquidity ratios measure a company’s ability to pay short-term obligations of one year or less. A high liquidity ratio indicates that a business is holding too much cash that could be utilized in other areas. A low liquidity ratio means a firm may struggle to pay short-term obligations. Current ratio reveals whether the firm can cover its short-term debts and is an indication of a firm’s market liquidity and ability to meet creditor’s demands. Industry standards for the current ratio are 1.0. This indicates that the company maintains a solid balance with having enough current assets to cover its short-term liabilities. Costco’s current ratio for the years 2017-2019 has been consistent and in every year doing better than industry standard. The quick ratio is an indicator of a company’s short-term liquidity position and measures a company’s ability to meet its short-term obligations with its most liquid assets. Costco quick ratio over the years 2017-2019 has been good and has done better than industry standard (Gregory, 2017).
Efficiency ratios measure a company’s ability to use its assets and manage its liabilities effectively. Inventory turnover ratio is used to determine if sales are enough to turn or use the inventory. In 2019, Costco reported an inventory turnover ratio of 11.8. This was above the retailing industry average inventory turnover ratio of 8.91 times for the same year. High inventory turnover ratio indicates the higher demand for its products, which could have been driven by better product campaign, promotional activities, among others. Its inventory turnover ratio was also higher than that of its major competitors, Walmart Inc and Kohl’s Corporation. Higher inventory turnover than competitors indicates that the company takes fewer days to clear its inventory.
Days sales of inventory is the average number of days it takes for a firm to sell off inventory. Accounts receivable turnover ratio measures a company’s effectiveness in collecting its receivables or money owed by clients. The ratio shows how well a company uses and manages the credit it extends to customers and how quickly that short-term debt is collected or being paid. Costco account receivable turnover has been above average during the years listed. Days sales outstanding is a measure of the average number of days that it takes a company to collect payment after a sale has been made. Asset turnover ratio is a type of efficiency ratio that measures the value of your business’s sales revenue relative to the value a company’s assets. It’s an excellent indicator of the efficiency with which a company can use assets to generate revenue. Costco’s total asset turnover has maintained a relatively consistent showing over the years. The ratios range has been between 3.36 to 3.58. However, between the years 2017-2019 there has been a steady decline in the total asset turnover ratio. This shows that the firm may be underutilizing their assets as they grow. This often happens when an organization holds significant cash. Fixed asset turnover ratio compares net sales to net fixed assets. It is used to evaluate the ability of management to generate sales from its investment in fixed assets. A high ratio indicates that a business is doing an effective job of generating sales with a relatively small amount of fixed assets.
The debt ratio is a financial ratio used in accounting to determine what portion of a business’s assets are financed through debt. The Debt to equity ratio is used to evaluate a company’s financial leverage. Costco’s debt ratio was able to reduce its debt ratio by 2019. This indicates that the company has been utilizing equity funding for growth and operations as compared to its reliance on debt. This capital structure is excellent for companies that may be susceptible to economic downturns such as recessions. Unfortunately, this conservative strategy does come with negative consequences. Specifically, the organization may be missing out on expansion opportunities due to the scarcity of liquid resources.The equity multiplier is a risk indicator that shows how leveraged the company is to both investors and creditors. The times interest earned ratio is a measure of a company’s ability to meet its debt obligations based on its current income. The cash coverage ratio is useful for determining the amount of cash available to pay for a borrower’s interest expense and is expressed as a ratio of the cash available to the amount of interest to be paid. To show a sufficient ability to pay, the ratio should be substantially greater than 1:1
Gross Profit margin = Net Sales – Cost of goods sold / Net Sales. Costco Wholesale’s gross profit margin decreased in 2017 (13.3%), 2018 (13.0%) and 2019 (13.0%.) It indicates that after Costco pays off its inventory costs, Costco still has 13.3% of sales revenue to cover its operating costs. The higher the GM ratio is more desirable. The higher GM ratio indicates that the company is selling its inventory at a higher profit percentage. In 2018, Costco’s GM marginally dropped to 13.0%. This decrease in GM was again followed by a slight drop to 13.05% in 2019.
Operating Profit margin = EBIT/ Net sales = 3.19% in 2017; 3.16% in 2018; and 3.10% in 2019. The operating margin (OM) ratio of Costco has seen a consistent decrease over the three years. It indicates that an average of 96.85 cents on every dollar of Costco’s sales are used to pay for variable costs. Merely 3.15 cents remain to cover all non-operating expenses or fixed costs. The OM ratio is remarkable for both investors and creditors because it shows how profitable and strong the company’s operations are. The OM ratio above 25% indicates financial stability and efficiency, OM below 25% indicates financial vulnerability (Ali et al., 2020). In this regard, Costco’s authority should take further steps, for example, reducing cost of goods sold, reducing labor costs, increasing efficiencies, and reducing operating expenses, etc. to improve its OM ratio.
Net profit margin= Net income/Net Sales. Costco’s net profit margin was 2.01%, 2.21%, and 2.40% in 2017, 2018, and 2019 respectively. This figure reflects profitability from sales, after including all operating, restructuring and extraordinary charges. Over the three-year period, Costco portrayed relatively better net margin than both BJ’s and Walmart; 0.98% and 1.2% in 2019, respectively.
EBIT return on assets (EROA) = EBIT / Total assets = 1.13%, 1.09%, and 1.04% in 2017,2018,2019. Its look like Costco EROA did not improve from 2017 to 2018 and 2019.
Return on assets ratio = net income/ total assets = 7.47%, 7.79%, and 8.16% in 2017, 2018, and 2019 respectively. The return on assets (ROA) ratio of Costco was 8.16% in 2019. This indicates that Costco’s shareholders get an 8.16% return from their investment on assets. In other words, it also means that every dollar invested in assets, Costco earns 8.16 cents of net income during this year. A higher ROA is more desirable because it indicates that the company is more effectively managing its assets to produce greater amounts of net income. The ROA over 5% is considered satisfactory (Calista and Widjaja, 2019). In this regard, Costco should maintain its current ROA for a long period.
Return on equity ratio = net income/ Total equity = 24.50%, 24.26%, and 23.76% in 2017, 2018, and 2019 respectively. Total equity = ((total shareholders’ equity (+ total shareholders’ equity)/2. In 2019, the return on equity (ROE) ratio of Costco was 23.76%, indicating that every dollar invested in equity, Costco earns 23.76 cents of profits this year. A higher ROE is more favorable because it indicates that the company is using its investors’ funds effectively. The ROE of 15%-20% is considered satisfactory (Calista and Widjaja, 2019). In this regard, Costco should maintain its current ROE for a long period.
Profitability ratios are metrics that assess a company’s ability to generate income relative to its revenue, operating costs, balance sheet assets, or shareholders’ equity. Profitability ratios show how efficiently a company generates profit and value for shareholders.
Costco is a very strong company and its ratios has shown that during the years 2017-2019 it has meet and sometimes exceeded industry standards.
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