Free «Financial Ratios» Essay Sample

Progress and performance evaluation is a vital exercise to the survival of any business. One of the most common methods to evaluate performance is the use of financial ratios. The latter express the relationships between two variables under evaluation (Groppeli, & Nikbakht , 2000). The numbers are obtained from company’s financial statements and are used to compare the performance of the company in question against firms within the same industry (Groppeli, & Nikbakht, 2000). In addition to the performance of the firm concerning finances, there is another important value that evaluates the performance of employees. Ratios are used for different purposes. A firm would be required to calculate several of them before they can authoritatively declare their performance concerning both their human capital and financial matters over a given period. Most ratios are calculated per year and mostly compare the performance of the present year to the previous one (Williams, Haka, Bettner, & Carcello, 2008). This report uses factual information for Motorola Company and can be used by investors and stakeholders to manage their investments. In addition, it indicates the company’s position and the various investment, profitability and return on investment ratios. The ratios are computed from data obtained from the company’s financial statements over the last ten years. The most crucial are Stats and Ratios that include Valuation Ratios, namely the Price/Earnings and the Per Share Data such as EPS (Bodie, Kane, & Marcus, 2004). The Profitability Ratios lay special attention to the Gross Margin and the management effectiveness ratios represented by the Return on Equity ratio. Concerning the Financial Strength, the Quick Ratio is computed while on Dividend Information the Dividend Yield ratio. For all the computed ratios, ten years of history are provided. The trend analysis reveals the share and ratio analysis performance data. The ratios computed are from the income statement and the share prices provided.

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Risk and Return

When analyzing return on investment, mainly two crucial concepts help to provide the foundation in the field of finance (Williams, Haka, Bettner, & Carcello, 2008). The first concept claims that a dollar received today is worth more than a dollar to be received tomorrow. The concept is identified as the time value of money (Bodie, Kane, & Marcus, 2004). The second concept states that a safe dollar is considered safer as compared to a risky dollar. In finance, the universal application of the two concepts is mostly accompanied by rational investment decision making. The latter is based on whether to take the risk or to take the return as the two have a direct relationship (Williams, Haka, Bettner, & Carcello, 2008). In other scenarios, the tradeoff between risk and returns forms the principles behind the many investment decision that firms and individuals undertake (Bodie, Kane, & Marcus, 2004). Whereas most investors are risk averse, it does not mean that they will completely avoid taking risks. It means that the investors will only take a risk that they are sure will reward them for taking it. Similarly, investors have varying degrees of risk aversion meaning that some are more willing to take the investment chance as compared to others (Williams, Haka, Bettner, & Carcello, 2008).

In case of Motorola Company, the issue of risk is relatively mitigated due to the nature of the industry. As the company is based on the technology and communication that is relatively stable, this makes the stocks in this sector equally stable. Share prices have been ranging from 13.078 dollars (the lowest share price) to 85.076 dollars (highest one). The share prices indicate major fluctuations although the prices have been generally rising steadily over the years. The observed returns of the company have also been high, the provided ratio on earnings per share (EPS) evidences that the values range from -10.8 to 11.94. Another ratio can be used to show the dividend cover ratio computed by dividing earnings per share to dividend per share. The values for dividend cover ratio range from -7.71429 to 10.6607143 which also indicate a high return to owner’s investment.

The Trend

Trend analysis is the use of ratios to compare the company performance using performance indicators that are established over time. It is normally done to inform about future events or even predict possible future company performance (Groppeli, & Nikbakht, 2000). Trend analysis normally involves the act of collecting financial information and applying the data to establish a pattern that is a trend using the historical data provided (Bodie, Kane, & Marcus, 2004). The relationship is based on examining the data in the form of tables and charts drawn as the one computed in the present Motorola Company study. The trend established can be used to predict and make informing decisions about future company events at a glance, even before investors take time to critically analyze the stock as they seek to make investment decisions.

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From the computed data, the graphs indicate that the operating profit and the dividend per share (DPS) were stable throughout the period and had minimal fluctuations. The other ratios such as gross profit margin have been fluctuating over the ten years. The fluctuation trend is mostly due to the business environment and other factors affecting businesses, including fluctuations of interest rates and macroeconomic indicators that vary across the globe (Groppeli, & Nikbakht, 2000). Motorola, being a global company, must face turmoil in economies across the regions and specific countries in which it operates. However, the company maintained the operating profit ratio. Computed by dividing the profit before interest with sales, this ratio has been constant for the ten years that were analyzed. The trend analysis shown from the data provided can be used to forecast the likely scenario in the next three or four years. From the trend, investors can establish whether they are likely to get good returns from their investment as predictability is established (Groppeli, & Nikbakht, 2000).

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