Financial Analysis : Stock Return

Financial ratio analysis is a valuable tool that allows one to assess the success, potential failure or future prospects of the company (Bazley 2012). The ratios are helpful in spotting useful trends that can indicate the warning signs of

The main objective of the paper is to analyse last five years financial statements of two non-financial companies that are listed in London Stock Exchange (LSE). These companies are Tesco Plc. (TSCO) and Sainsbury Plc. (SBRY). This paper will discuss the profitability of these two companies and its impact on investor performance indicators. Moreover, the paper will analyse the financial statements of these company and will also calculate the financial ratios for these companies. In the end, the paper will suggest that which company has better performance by assessing the ratios.

In this paper, the financial statement for Google Inc. as year ended 2012 will be used for analysis where different ratios will be evaluated and calculated. The analysis will include Horizontal Analysis on income, Horizontal Analysis of the Balance Sheet, Trend Analysis on Net Sales, Income from Continuing Operations, Net Income Vertical Analysis, Income statement Vertical Analysis, Balance Sheet Ratio Analysis: Working Capital, Current Ratio, Cash Ratio, Acid-Test (Quick) Ratio, Inventory Turnover, Days’ Sales in Inventory, Gross Profit Percentage, Accounts Receivable Turnover, Days’ Sales in Receivables, Debt Ratio, Debt to Equity Ratio, Times-Interest-Earned Ratio, Profit Margin Ratio, Rate of Return on Total Assets, Asset Turnover Ratio, Rate of Return on Common Stockholders’ Equity, Earnings per Share Price, Earnings (P/E) Ratio, Dividend Yield, Dividend Payout, and uses of charts and graphs for the discussion of the results (Warren, Reeve, J& Duchac, 2009). The importance and the implications of the ratios to the Google Inc Company will be discussed and the investment potential determined.

In order to understand the dividend policies of a company the dividend payout ratio and the dividend yield ratio are identified. Investors focus on the stock price and the dividends to decide whether to cash in on a stock. At the same time, the performance of a stock when compared to the overall industry performance is necessary when buying and purchasing stocks. Investors receive dividends regularly, based on the declared dividends that are mostly affected by the earnings.

Ratio analysis is a very useful tool when it comes to understanding the performance of the company. It highlights the strengths and the weaknesses of the company and pinpoints to the mangers and their subordinates as to which area of the company requires their attention be it prompt or gradual. The return on shareholder’s fund gives an estimate of the amount of profit available to be shared amongst the ordinary shareholders; where as the return on capital employed measures an organization 's profitability and the productivity with which its capital is utilized. Return on total assets is a profitability ratio that measures the net income created by total assets amid a period.

Ratio analysis is a tool brought by individuals used to evaluate analysis of information in the financial statements of a business. The ratio analysis forms an essential part of the financial analysis which is a vital part in the business planning. There are 3 different ways of assessing businesses performance and these are: solvency, profitability and performance. Ratio analysis assists managers to work out the production of the company by figuring the profitability ratios. Also, the management can evaluate their revenues to check if their productivity. Thus, probability ratios are helpful to the company in evaluating its performance based on current earning. By measuring the solvency ratio, the companies are able to keep an

Ratio analysis shows the correlation within certain figures of financial statements, like current assets and current liability, and is used for three types of company needs- within, intra- and inter-company. Association can be shown in proportion, rate, or percentage and can evaluate company’s liquidity, profitability, and solvency. Liquidity ratios show company’s ability to pay obligations and fulfill needs for cash; profitability ratios show wellbeing and success for the certain time period; and solvency ratios show company’s endurance over the years.

The paper illustrates that financial ratio analysis is an important tool for firm’s to evaluate their financial health in order to identify areas of weakness so as to institute corrective measures.

The success of a business depends on its ability to remain profitable over the long term, while being able to pay all its financial obligations and earning above average returns for its shareholders. This is made possible if the business is able to maximize on available opportunities and very efficiently and effectively use the resources it has to create maximum value for all involved stakeholders. One way the performance of a company can be measured on critical areas such as profitability, its ability to stay solvent, the amount of debt exposure and the effectiveness in resource utilization, is performing financial analysis where a set of ratios provides a snapshot of company performance

Rate of Return on equity measures a corporation 's profitability by revealing how much profit a company generates with the money shareholders have invested. It indicates how efficiently the business uses its investment funds. For Tesco, Rate of Return on Shareholders’ Fund has increased from 13.85% in 2004 to 14.91% in 2009. This shows an improvement of 1.06% in five years period. When one examines the Sainsbury’s Rate of Return on Shareholders’ Fund, there is an increase from 7.76% to 8.36%. There is a 0.6% growth in the Rate of Return on Shareholders’ Fund. In comparison with Tesco, Sainsbury’s Rate of Return on Shareholders’ Fund is lower. Shareholders earned 13.85% from their investment (measured in book value

The “financial statements are formal reports providing information on a company's financial position, cash inflows and outflows, and the results of operations” (Hermanson, p.22). There are four main components that make up a financial statement. The four parts are, balance sheet, income statements, cash flow and, statement of owner’s equity. The balance sheets role is to define the company’s assets liabilities and revenue of the business. The income statement shows the income within the company. Cash flow reviews the position of the company by cash payments and receipts. Lastly, the statement of owner’s equity shows the amount of earnings, stock and other capitals of people in the company. (Hermanson, p.34-35).

Even though there are flaws in the CAPM for empirical study, the approach of the linearity of expected return and risk is readily relevant. As Fama & French (2004:20) stated “… Markowitz’s portfolio model … is nevertheless a theoretical tour de force.” It could be seen that the study of this paper may possibly justify Fama & French’s study that stated the CAPM is insufficient in interpreting the expected return with respect to risk. This is due to the failure of considering the other market factors that would affect the stock price.

Ratio analysis is generally used by the company to provide some information on how the company has performed during that year, so that the parties involved including shareholders, lenders, investors, government and other users could make some analysis before making any further decision towards that particular company. As mentioned by Gibson (1982a cited in British Accounting Review, 2002 pg. 290) where he believes that the use of ratio analysis is such an effective tool to evaluate the company’s finance, and to predict its future financial state. Ratios are simply divided in several categories; these are the profitability, liquidity, efficiency and gearing.

This variable was regressed against dividend pay-out. Correlation analysis result will be provided first and later that of regression. Pearson correlation is used for the correlation analysis, Pearson’s’ correlation examines the strength of a relationship between variables. The results of correlation test have been summarised in Table 6. The Pearson correlation between dividend pay-out ratio and profitability seem to have worsened as time evolves, from a positive 0.010 pre-crisis decreasing to negative -0.019 during the crisis with an increase to positive 0.007 post crisis. With total period at positive 0.004, however, this overall positive relationship was not found to be significant as the p-value was 0.931 which is higher than the 0.05 threshold. The regression results in Table 7 show that profitability has an unstandardized coefficient of 0.041 for the total sample period, indicating a positive relationship. Thus, one percent increase in profitability would lead to 0.041% increase in dividend pay-out ratio. Which implies an increase in profitability does lead to an increase in dividend pay-out, likewise a decrease in profitability does lead to decrease in dividend pay-out. However, the p-value of regression is 0.878, which is again far above the 0.05 threshold. Overall although a positive relationship between dividend pay-out ratio and profitability was found in this study, as expected from reviewing existing literature and projected hypothesis. This

Financial ratio, also known as accounting ratio, entails a relative magnitude of any two values, in this case “numerical” obtained from a firm’s financial statement. They are basis of valuing a company hence it’s a complex task that requires a critical analysis of various components of financial ratio such as profitability ratio, debt ratio, investment valuation ratio, operating performance ratio, cash flow indicator ratio and liquidity measurement ratio. Therefore, the following financial ratio analysis shall value Coca-Cola consolidated company and PepsiCo Inc. (PEP) through a critical comparison based on their asset utilization, profitability, debt management, market ratio and liquidity.