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Financial Statement Analysis

1320 words - 5 pages

Team E has evaluated current and quick liquidity ratios for AT&T, Target and Toyota. The current ratio, also known as the working capital ratio, shows the businesses ability to pay current liabilities by using current assets only. The quick ratio disregards inventory to spotlight immediate liquidity by focusing on how well one could pay current liabilities without the sale of inventory. Higher ratios imply a greater risk to creditors while a lower ratio implies that the business is financially stable. The information below tells us that Target is a greater risk to creditors than Toyota and AT&T. AT&T does not report inventory on the financial statement, therefore, the quick and current ratio are the same. The quick ratio shows that Target has more assets than liabilities, putting them in a stable financial situation even though they have the higher ratios.Current Ratio= Total Current Assets/Total Current LiabilitiesQuick Ratio= Cash + Accounts Receivable (+ any other quick assets)/Current LiabilitiesCurrent RatioQuick RatioToyota121,720.4/120,255.2=1.01121,720.4-18,386.8/120,255.2=.86Target17,488/10,512=1.717,488-6,705/10,512=1.03AT&T22,556/42,290=0.63522,556/42,290=0.635Dupont ratio (ROE) and Profit MarginThe Dupont analysis is a useful tool to predict future performance, develop investment strategies, and assess capital needs. Assets are measured at their gross book value rather than at net book value in order to produce a higher return on equity (ROE). The ROE is also known as "DuPont identity" and tells us that ROE is affected by three things: profitability, operating efficiency, and leverage (Investopedia, 2009).Measuring assets at gross book value removes the incentive to avoid investing in new asset (Isberg, 1998). The DuPont ratio can be broken down to solve other business problems by locating exactly where deficit begins. Profit Margin indicates what portion of sales contributes to the income of a company. For example, using the information below tells us that for each dollar of sales that Target generates, they are contributing almost .30 cents to its bottom line. Targets profit margin is much lower because of the heavy competition in retail. AT&T does not have much competition and can charge what they wish.ROE=Profit Margin*Total Asset Turnover (Sales/Assets)*Equity Multiplier (assets/equity)Gross Profit Margin=Gross Profit (Revenue-Costs of Goods Sold) / Revenue *100ROEProfit MarginToyota22.2%*(264,758.9/326,887.8)*(326,887.8/119,538)=.49(58,783.4/264,758.9)*100=22.2%Target29.53%*(64,948/44,106)*(44,106/13,712)=1.4(19,182/64,948)*100=29.53%AT&T59.77%*(124,028/265,245)*(265,245/96,347)=.77(74,133/124,028)*100=59.77%Asset Utilization and Financial LeverageAsset utilization measures a company's ability to make best use of its resources (Isberg, 1998). Inventory turnover is one way to measure asset utilization. Properly measured and understood, asset utilization can be used as a metric for how well the business is...

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