Ratio analysis provides another set of patterns to evaluate before deciding to buy or sell a company’s stock. Ratios reveal more than just the past performance; ratios reveal how effectively the company converts product sales into shareholder returns. Ratios provide a gauge for comparison across time and across the industry (competitors), while removing the impact of size differences. Would you rather invest in Company A, with $1.0 million in earnings, or Company B, with $10.0 million in earnings? It’s hard to say. However, if Company A earns a ROA of 25%, while Company B earns a ROA of 2%, the decision becomes clear.
Liquidity ratios provide clues to how effectively the company manages its cash collection cycle. Asset turnover ratios reveal how efficiently the company uses its assets to generate profits. Debt management ratios reveal how leveraged a company is, which provides an indication of future risk. Taken together, a company’s ratios and its ratios compared to the industry competitors provide important insight to the investment strength of the company’s stock. In this assignment, you will review the trend in your chosen company’s financial ratios over the past 3 years and compare your chosen company’s ratios to the average ratios from top competitors in the industry.
Prior to beginning work on this assignment,
In your paper, address the following four parts in a Word document:
Part 1: (three to five paragraphs)
Part 2: (two paragraphs)
Part 3: (one to two paragraphs)
Part 4: (one paragraph)
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• I don’t understand which ratios are good or bad. Could you explain it to me?
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The Section 2: Financial Ratio Analysis paper
Note: Since this is Section 2 of the Week 5 final project, there is no need for an introduction paragraph.
Carefully review the Grading Rubric (Links to an external site.) for the criteria that will be used to evaluate your assignment.
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