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Comparing Profitability: Companies: Nfx, Kmg And Burlington Using Roa, Roe And Other Ratios To Compare Profitability Of These Three Companies.

940 words - 4 pages

Comparing Profitability:Companies: NFX, KMG and Burlington1) The rate of return on asset (ROA) calculates a firm's effective autonomous use of an asset to generate earnings without regards to the assets financing. Banks and other creditors use this ratio to evaluate a firm's risk of going bankrupt. The ROA can be broken down to analyze Profit Margin and Asset turnover Ratio, this will help you discover potential strengths and weakness of different entities. When you compare the three companies NFX perceives to have the highest ROA ratio, even though Burlington has the highest profit margin, but NFX ability to rapidly transform inventory to sales explains why NFX has the highest ROA for the last three years. From 1998 to 2000 NFX, KMG and BR had all experienced constantly increasing ROE's, but in 2001 their ROE dropped an average of 38%. In 2001, BR posted the greatest ROE of about 12.34%. KMG's drastic decline in ROE to 17% could have been due to the chemical industries volatility and, therefore, had a direct effect on KMG's total earnings. Another contributing factor to the decline in the companies ROE, may have been their 10% average decrease in asset turnover over the past two years. After taking everything into account over the past five years, BR has still provided the best ROE compared to the other two firms'.2)When analyzing the solvency ratios of the three companies we compare debt to equity, debt to assets, and interest coverage ratios. Between years 1998 to 2002, KMG has achieved the greatest amount of solvency risk. KMG's has an average debt-to-equity percentage of 138% since 1998 compared to BR's and NFX's average of only about 90.32% and 50.81%. KMG has doubled the amount of debt to equity compared to the two other companies. On top of that KMG's debt to asset ratios over the past five years, has averaged about 39.28% compared to, BR's and NFX's average of about 37 % and 23%. Also KMG and BR have the lowest coverage ratios over the last five years, averaging around three times less than NFX. These facts lead use to think that in the long run debt holders of both KMG and BR would probable want to trade in their debt to acquire NFX bonds. The lack of confidence in the ability of KMG and BR to have the resources to pay back their long-term debt is a growing concern.3)We can tell from the recent financial statements that, KMG and BR use the "successful efforts" method of accounting for exploration costs while NFX currently uses the "full cost" accounting method. Under the "full cost" method, NFX has the ability to capitalize all cost whether successful or not and also expense the costs at a slow rate. This method has the ability to smooth earnings. Therefore, NFX's use of the "full cost" method could result in inflating...

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