Multiple Discriminant Analysis

Companies’ Solvency, Liquidity, And Profitability Based On Current Ratio, Return On Sales, Earnings Per Share (EPS), Debt Ratio, And Price Earnings

Table no 8 shows the credit rating, Image rating and the Investor confidence index. The credit rating of the company has been ranging from B+ to A+. The best in industry score is 20 while the overall credit rating is 20.The image rating is 59 with best in industry and overall rating being 20. The investor confidence index is fair as compared to competitors A and C who have an excellent rating.

In order to ascertain how well a company is performing, analyses must be done in regard to the business being stable, including its’ ability to pay debts, how much cash or other liquid assets are available, and whether the organization is viable enough to continue operations. These analyses typically look at income statements, balance sheets, and statements of cash flow, where current and past performance will be studied with the goal of predicting how the company will perform in the future.

Where π1 and π2 are prior probabilities of good and bad credit populations, Q (2∣1) and Q (1∣2) compute the probability of making Type I errors, i.e., a customer with good credit is misclassified as a customer with bad credit, and Type II errors, i.e., a customer with bad credit is misclassified as a customer with good credit, and A (2∣1) as well as A (1∣2) are the corresponding misclassification costs of Type I and Type II errors.

When obtaining the liquidity ratio for PepsiCo I took the current assets of 2004, $8,639.00, and divided them by 2004’s current liabilities, $6,752.00. After dividing the two numbers the current ratio was 1.27:1. I followed with the 2005 year and divided the current assets by the current liabilities, $10,454.00 divided by $9,406.00, the current ratio for 2005 was 1.11:1. After finding the PepsiCo liquidity ratio I moved on to find Coca-Cola’s liquidity ratio in order to compare the two. By following the same formula I found the 2004 current assets, $12,281.00, and divided them by the current liabilities, $11,133.00, finding the ratio for 2004 to be 1.10:1. When looking for the 2005 liability ratio I took the 2005 current assets, $10,250.00, and divided

In the case of Assessing a Company’s Future Financial Health, the case concentration is on SciTronics, a medical device company, performance measures based on the organization’s three primary financial data sources in Exhibit 1 & 2. Utilizing the 9 steps of corporate financial system, I will be able to analyze the financial health of the company to assess whether it will remain balance over the ensuing 3-5 years. The measures are grouped by focusing on “Financial Ratios” such as: 1.) profitability measures, 2) activity measures, and 3) leverage and liquidity measures. Using the financial data sources, I would be able to make recommendations regarding SciTronics 126 million loan request.

However, two known authors in this field of study believe that companies with low business risk obtains factors of production at a lower cost which may also pave to the ability of the firm to operate more efficiently (Amit & Wernerfet, 1990). Therefore, many stockholders faced a high of uncertainty; this is because some companies do not have the financial strengths to cover its debts that even may result to bankruptcy.

In this case, a summary sheet which contains 14 sets of financial data from 14 different industries is provided. The task is to match 14 different firms with 14 industries by distinguishing the differences (e.g. sources of financing, profitability, the inventory turnover and the accounts receivable collection period) in the financial structures.

Regression analysis seems to be extremely useful in determining financial distress and the bankruptcy of firms. In fact, in a particular study conducted by Bredart in 2014, it was presented that regression analysis was able to show an 84% prediction accuracy rate in determining bankruptcy of 870 firms between the years of 2000 and 2012 (Bredart, 2014). The independent variables used in Bredart study included profitability (net income/total assets), liquidity (current assets/current liabilities), and solvency (equity/total assets) while the dependent variable included financial distress.

For the analysis we have used the historical financial data of the company, the history of the company and its financing policy, and the financial data of its competitors.

Another measure of a company’s ability to pay back loans, this time over a long period, measures solvency. Coca-Cola’s debt to total assets ratio is 35% in 2004 and 33% in 2005 compared to PepsiCo’s less attractive ratio of 52% in 2004 to 55% in 2005. Coca-Cola’s debts represent a healthy percentage of assets and in this case the lower the number the better. Coca-Cola’s debt to total assets ratio decreased by 2% from 2004 to 2005 while PepsiCo’s ratio increased by 3%. Were a potential lender or investor to look at these numbers alone they would prefer the performance of Coca-Cola over PepsiCo but there are still many calculations to be made and factors to consider.

When a company goes bankrupt, intangible assets depreciate at a much faster rate than regular assets; therefore, most pharmaceutical companies already tend to avoid debt. Therefore, in this case a high current ratio does not indicate unsatisfactory business condition, but a rather favorable and smart condition for the company.

Part 1 : Examine and analyze the financial ratios for eight pairs of unidentified companies and match the description of the company with the financial profile derived from the financial ratios.

To asses Morse Photo Company’s financial situation and creditworthiness we examine some key figures and use Z – score model.

Current ratio of Company X and Y is 1.80, and 2.55 respectively. This ratio presents the proportion of current assets to current liabilities. This ratio provided a measure of degree to which current assets cover current liabilities. Since both companies have excess of current assets over their current liabilities, they met basic requirement of safety margin against uncertainty in realization of current assets and funds flows. Generally, it is suggested that a firm should have neither a very high ratio nor a very low ratio. Very high ratio implies heavy investments in current assets reflecting under utilization of the resources. A very low ratio endangers the business in to risks of not being able to pay short term requirements. Normally, it is advocated to have the current ratio as 2:1 (Baker and Powell, 2009).