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Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

9th Edition
Eugene F. Brigham + 1 other
ISBN: 9781305635937
Textbook Problem
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In Chapter 3, we looked at Whole Foods’ financial statements. In this chapter, we will use financial Internet websites (specifically, www.morningstar.com and www.google.com/finance) to analyze Hewlett Packard Co. Once on either website, you simply enter Hewlett Packard's ticker symbol (HPQ) to obtain the financial information needed.

The text mentions that financial statement analysis has two major components: a trend analysis, where we evaluate changes in key ratios over time, and a peer analysis, where we compare financial ratios with firms that are in the same industry and/or line of business. We will do both of these types of analysis in this problem.

Through the Morningstar website, you can find the firm’s financials (Income Statement Balance Sheet and Cash Flow) on an annual or quarterly basis for the 5 most recent time periods. In addition, the site contains Key Ratios (Profitability, Growth, Cash Flow, Financial Health, and Efficiency) for 10 years. We will use the Key Ratios on this site to conduct the firm's trend analysis. (At the bottom of the screen you will see that you can dick “Glossary” to find definitions for the different ratios. For example, Morningstar’s Financial Leverage ratio is the same as the Equity multiplier that we use in the textbook.)

On the Google Finance site, you can find the firm’s financial statements for the 4 most recent years or the five most recent quarters and key financial data for related companies for the most recent year or quarter. We will use the related companies' annual data to conduct the firm’s peer analysis. Notice that when you go to the “Related Companies” screen, you can “add or remove columns.” Click on that phrase, and you can check which peer data items you’d like to show on the computer screen. Also, once you have chosen the data, you can click on a term, and the companies will be ranked in either ascending or descending order for the specific term selected.

From the Google Finance site, look at Hewlett Packard’s liquidity position (as measured by its current ratio). How does this ratio compare with those of its peers?

Summary Introduction

To determine: The liquidity position of Company H and comparison of the ratio with its peers.

Liquidity Ratio:

The liquidity ratio is a measure of the position of the liquidity of a company. This ratio determines the capability of a company to meet its short-term debts. The liquidity ratios are classified into current ratio and the quick ratio.

Explanation

The liquidity ratios analyze the company’s ability to pay the debts. The liquidity ratios are as follows:

  • Current ratio: The current ratio measures the liquidity of the company and the ability of the company to pay the short-term debts. The current ratio is determined by dividing the current assets of the company from the current liabilities...

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