Financial Statement Analysis Of Three Publicly Traded Companies Essays Example
Analysis of Liquidity Strength – Availability of Sufficient Cash Balances
Under this section, the liquidity strength of each public company will be analyzed (through current and quick ratios) to measure the ability to cover current or short-term liabilities through current assets in the event they are called back for payment by short-term creditors . For analysis, the following data is calculated from financial information of every business:
Analysis of Current Ratio
Quick or Acid-Test ratio Analysis
For a more detailed analysis, quick ratio (also known as acid-test ratio) is analyzed. This ratio is also called acid-test because it excludes those current assets from the calculation which cannot be easily converted to cash without slight decline in their value. Normally, inventories and prepayments fall into this category. This ratio includes only those assets of short-term nature that are easily convertible to cash without diminution in their value. These include cash and bank balances, marketable securities as well as receivables etc.
Analytical examination of financial data reveals that Delta Airlines Inc. seems to suffer from liquidity weakness. It only has $0.38 to repay every dollar of short-term obligations to creditors. In contrast, Coca Cola and Apple Inc. seem to have sufficient liquidity into their operations to finance working capital needs. The globally acceptable standard for quick ratio is 1:1 . This reflects that Apple Inc. is, again, displaying strong liquidity strength by outperforming the global benchmark. Coca Cola Company is operating closely to this standard but Delta Airlines is still underperforming.
Overall, the counterparty or default risk is kept under control for Apple Inc. and Coca Cola whereas for Delta Airlines Inc. (comparatively) the situation is little bit alarming. This is because a close observation makes it clear that Delta Airlines finds it difficult to provide value added services and much of its current assets are locked into un-saleable inventories. Any slight decline in the value of its current assets will greatly harm the ability of Delta Airlines Inc. to repay every dollar to short-term creditors. Apple Inc. and Coca Cola seem to be in good liquidity shape whereas Delta Airlines Inc. seems to suffer from liquidity management issues concerning its services.
Investment in Business Operations
The following makes it clear that fixed asset utilization capacity to generate sales revenue, as clarified by Fixed Asset Turnover , also declined for each of the business considered:
Close observation of financial information reveals that Coca cola reduced its investment, for the year 2013, in Property, plant, and equipment but invested heavily in purchases of investments. Following the same fashion, Apple Inc. reduced investments in both of these accounts.
The overall analysis in this section clearly stipulates that Apple Inc. outperforms the other two companies despite it reduced investments in operations. Even then, it ability to generate sales revenue through efficient utilization of fixed assets is really very high. At second position, Coca Cola outperforms the Delta Airlines because it invested heavily in operations, but not in fixed assets acquisition.
Efficiency in Operations and Profit Generation Capacity
Here, on an overall comparative basis, Delta Airlines has high net income generating capacity and operational efficiency in 2013. This is due to taking advantage of tax credit/break of $8,013 million in 2013 which reduced the taxable income and resulted in negative provision for income tax (that was considered as revenue). Apple Inc. reserved the second position in net income generation capacity and efficient operations whereas Coca Cola possess the third position.
Grading Assigned to Each President Based on Financial Performance
After a careful financial statement and data analysis, one may arrive at a conclusion that since Apple Inc. outperforms the other two public companies with regards to liquidity, sales revenue generation, utilization of fixed assets and ability to generate more net income, it is decided to assign “A” grade to its President.
Delta Airlines took irregular advantage of negative tax credit/break which improved its net income generating ability in 2013 only. Since it suffers from liquidity management issues, able to generate less sales revenue than two rivals and inefficiently utilizes its fixed assets (as made evident by fixed asset turnover), a grade “C” will be assigned to its President for overall poor performance from 2012 to 2013.
Ailemen, I. O., & Folashade, O. (2014). Working Capital Management and Profitability of the Manufacturing Sector. Retrieved February 17, 2015, from Global Journal of Management and Business Research: C. Finance: http://www.journalofbusiness.org/index.php/GJMBR/article/viewFile/1350/1257
Chang, S.-H. (2013). The Relationship between Organization Strategy, Fixed-Assets Investment and Earnings Quality. Retrieved February 17, 2015, from Asian Journal of Finance & Accounting - Macrothink Institute: http://www.macrothink.org/journal/index.php/ajfa/article/view/3802
Sowndharya, R. (2014, December). Analysis of Financial Performance of Non-Banking Financial Companies in India. Retrieved February 17, 2015, from The Global Journals - Indian Journal of Applied Research (IJAR): http://www.theglobaljournals.com/ijar/file.php?val=December_2014_1417759386__198.pdf
Yadav, P. (2014). Liquidity Analysis of Selected Pharmaceutical Companies: A Comparative Study. Retrieved February 17, 2015, from International Journal of Advance Research in Computer Science and Management Studies (IJARCSMS): http://ijarcsms.com/docs/paper/volume2/issue8/V2I8-0080.pdf
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