Company Financial Ratio Analysis - Report Example

Financial Ratio Analysis Report a) General Motors General Motors, one of the leading auto company in the world, especially in the field of production and sales aspects. Due to the development of the business of GM (General Motors) the economy of the country also got developed. For the purpose of evaluating the financial performance of the company, it is crucial to analyze various annual reports and financial statements periodically. Price Ratios Company Industry S&P 500 Current P/E Ratio NA 12.0 23.6 P/E Ratio 5-Year High 16.8 2.0 36.2 P/E Ratio 5-Year Low 4.0 0.2 7.3 Price/Sales Ratio 0.08 0.59 2.69 Price/Book Value NA 1.94 4.42 Price/Cash Flow Ratio 1.70 5.80 13.70 (GM Ord Shs: Key Ratios, 2007). Moreover, it is necessary to evaluate the performance of the business organization for measuring the fundamental financial status and implications as a whole. While evaluating the annual financial situation of General Motors, it is crucial to maintain the disclosure of the income statement, balance sheet and other relevant accounting frameworks. Analysis and interpretation of financial statements helps to evaluate the financial position and performance of an enterprise. "GM generated record third quarter automotive revenue of $43.1 billion. The company also achieved record global third quarter sales of 2.39 million cars and trucks, up four percent compared to the third quarter 2006, driven by exceptionally strong demand in emerging markets and improved performance in developed markets. GM also set a number of third quarter sales records around the globe, including a 22 percent increase in GMLAAM, 16 percent increase in the GMAP region, and 15 percent gain in GME." (GM Reports third quarter financial results, 2007). Analysis of Fundamental Ratios and Trends Ratio analysis is one of the important tools used to develop and interpret the financial statements of a business entity. Ratios measure the efficiency of operation of a business unit. Moreover, it also helps to analyze the financial strength or weakness of a business entity. The economic growth of the company is steady and stable. Like all other areas, the company is highly concentrating in the area of accounting and finance also. Similarly, a well defined plan is maintained by the company for protecting its quantum of stock:- 1. Maintain control over the entire amount of raw material obtained from the suppliers. 2. Utilize these quantum of raw materials for the production of goods with appropriate control and without making any wastage. 3. After making the delivery of finished goods, company tries to restore the balance of material/ inventory for further process. General Motors, a leading automobile manufacturer is following a systematic procedure for evaluating the financial performance of the entity. The major ratios are being calculated by GM for the analysis and interpretation of financial measurement are current ratio, quick ratio, asset turn over ratio, inventory turn over ratio etc. Therefore, the fundamental accounting ratios of GM are depicted below- Estimated Financial Ratios of General Motors a. . Liquidity Ratios: 1. Current Ratio = Current Assets = $1,000 Current Liabilities$310= 3.2 times. 2) Quick ratio= Quick Assets/ Current liabilities= $385/ $310 = 1.2 times. b) Leverage Ratios- 1) Debt ratio= Total Debt/ Total Assets=$1,064/$2,000= 53.2% 2) Debt to Net worth ratio= Total Debt/ Tangible Net Worth= $1,064/$2250= 47.29%. c) Operating ratios- 1) Net sales to Total Assets= Net Sales/ Total Assets=$3,000/$2,000= 1.5 times. 2) Gross profit ratio= Gross profit/ sales= 1,500/3,000= 50% d) Profitability ratios: 1) Basic Earning Power-(BEP) = EBIT/Total Assets= $283.8/ $2,000= 14.2% 2) Return On Total Assets (ROA) = Net income to stock holders/ Total Assets= $113.5/ $2,000= 5.7% 3) Price Earning Ratio (PE) = Price per share/ Earnings per share= $23/2.27= 10.1 times. 4) Market ratio= Common Equity/ Shares out standing= $896/ 50= $17.92 5) Return On Common Equity (ROE) = Net income to stock holders/ Common Equity= $113.5/$896= 12.7% 6) Price/ Cash flow ratio= Price per share/ Cash flow per share= $23/ $4.27= 5.4 times. All ratios are being calculated on the basis of estimated figure for making an analysis and interpretation of the financial performance. Similarly, leverages are providing information from various sources like accounting, marketing operations and so on. It may be of Operating leverage, financial leverage and combined leverage. Likely, trend analysis important for analyzing and interpreting the overall functioning and financial position of a business entity. It provides a summary of the overall concepts analyzed by the business entity. b) Analysis of the calculated Ratios It is necessary to undertake the proper analysis of the estimated ratios, not only on the basis of company but also on industrial basis. "GM dealers in the United States delivered 310,008 vehicles in October, 8,700 more vehicles when compared with year-ago performance, outpacing an industry expected to show a volume decline of about 4 percent." (GM reports 310,008 October deliveries, 2007). It is clear that industry average helps to analyze the overall financial performance of an industry as a whole, as compared to separate individual firms of GM. c) Interpretation of strength and weakness Ratios Ratio analysis communicates the financial strength and weakness of affirm in a most reasonable manner. The major strength of evaluating ratios are- It is helpful in analyzing the financial performance of an enterprise. Detailed analytical review of trend of strategic ratios helps the management in the task of planning and forecasting. It helps to measure the efficiency of operations of an enterprise. It facilitates interfirm comparison. It is possible to test the liquidity, solvency and profitability of the enterprise. It is essential to take various investment decisions. It simplifies the comprehension of financial statements. Likely, the major weaknesses of ratios are as follows- A single ratio is not suitable for evaluating the good or bad performance of the management. Ratios of any particular period are not providing adequate helps to management, because comparison of ratios is a crucial fact. Ratios will not reveal all relevant informations about the business operations, it gives only a summary. Ratios are not treated as conclusions; they are only the means to draw conclusions. Ratios are related to past data, but financial analyst requires future requirements. It is a failure to reveal the non monetary aspects of the organizational environment. It is quirt difficult to calculate ratios, in case of price level changes. Lack of qualitative factors. d) Assessing the financial condition It is fundamental to assess the financial conditions and relevant performance of the business entity, to know about the functioning of the organization. The present financial conditions of the General Motors is quiet strong. It is crucial to evaluate the financial implications of a business enterprise in an effective manner for identifying the results of an entity as a whole. General Motors, one of the leading auto companies in the world, is holding a prominent market position in the global market due to its proper functioning and sound financial structure. Even though, the over all financial implications of General Motors is good, it is adequate to undertake additional enhancement of the automotive business through firm and sound financial performance for improving the financial liquidity and feasibility. In addition to this, for improving the financial conditions of an entity it is significant to give stress for fundamental tools of financial analysis and planning. So, the concept of ratio analysis is crucial for evaluating the overall financial implication of an organization. e) Factors affecting the Financial Condition There are several factors associated with the financial conditions of a business enterprise; one among them is ratios and analysis of major ratios foe evaluating and comparing the financial performance of two accounting period. In the case of business entity, finance is the core area for undertaking the major operations, so the adequate and effective implementation of financial management and policies are significant. In addition to ratios, it is necessary to taken in to consideration several other technical measures that may contribute towards the over all achievements of the company. Other effective measures that contribute to the entire finance of an entity are cash flow analysis, fund flow analysis, cash budgeting, capital budgeting etc. Being one of the largest auto companies in the global market, GM used to implement all fundamental financial tools for its effective analysis and interpretation in a systematic manner. f) The over all functioning of General Motors The financial statements and other relevant reports are key to carry on the further proceedings of the business entity as a whole in future. As far as the annual reports and the concept of shareholders' view point are taken in to consideration, it is very clear that the General Motors is holding a marvelous position in the world market. Annual report usually provides a synopsis of the entire business undertaking within an accounting period. Shareholders are eager to know about the financial performance and the condition as a whole to aware about the aspects of dividends or any other relevant returns. g) General Motors in Future By taking in to consideration the present financial scenario and other procedural aspects, it is essential to evaluate the future impact of the workings of General motors. "The auto industry's race to create commercially viable hydrogen fuel cell vehicles should be considered as a marathon not a sprint, argues Larry Bums, General Motors' research and development chief. That being the case, then GM recently sped up the pace with the successful completion of a trans-Europe endurance run for its HydroGen3 fuel cell prototype." (McCormick, 2004). So, competition is one of the key issue being faced by GM in future, so it requires more advanced and systematic procedures for overcoming its major difficulties through better financial planning and controlling. Then only it is possible to attain the technical feasibility and financial viability in a most successful manner. So, by implementing better forecasting and interpretation, GM is trying to minimize its relevant problems in the future. h) Non Financial Considerations In addition to the financial implications, certain non monetary aspects are also crucial to carry out the business properly. An effective management system is a key factor for this concept. Because proper organizational manual, forms and norms, adequate staffs, and other relevant research procedures are essential for undertaking the business functions systematically. Effective control and increased efficiency is necessary for measuring the overall performance and profitability. Rather than this, not only financial aspects, but also non financial aspects are important to take quick and meaningful decisions relating to the business in future. Conclusion While analyzing the financial areas of a business unit, say General Motors, it is necessary to evaluate the overall funds and its managing, which is essential for taking a suitable financial decision by taking ratios as the key. Procurement and effective utilization of funds are crucial for this. Appropriate analysis and interpretation of financial statement and implementation of various tools and techniques are contributing to a great extend in the overall performance of the enterprise. Reference GM Ord Shs: Key Ratios. (2007). Price Ratios. MSN Money. Retrieved November 26, 2007, from http://moneycentral.msn.com/investor/invsub/results/compare.aspPage=PriceRatios&Symbol=GM GM Reports third quarter financial results. (2007). GM Automotive operations. Q3 2007 Earnings Release. Retrieved November 26, 2007, from http://phx.corporate-ir.net/phoenix.zhtmlc=84530&p=irol-earnings GM reports 310,008 October deliveries. (2007). Pardomain.com. Retrieved November 26, 2007, from http://www.prdomain.com/companies/G/GeneralMotors/newsreleases/200711248621.htm McCormick, John. (2004). Driving toward the future: GM fuel cell endurance run shows progress on road to commercial viability. Auto motive industries. Find articles. Retrieved November 26, 2007, from http://findarticles.com/p/articles/mi_m3012/is_8_184/ai_n6175864 Read More