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Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

Conducting a Financial Ratio Analysis on HP INC.

Use online resources to work on this chapter's questions. Please note that website information changes over time, and these changes may limit your ability to answer some of these questions.

In Chapter 3, we looked at Dunkin' Brands' financial statements. In this chapter, we will use financial Internet websites (specifically, www.morningstar.com and www.google.com / finance) to analyze HP Inc., a computer hardware company. Once on either website, you simply enter HP Inc.'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 freer 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 five 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 click "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 four 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 tire 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 tire specific term selected.

6. From the Google Finance site, look at HP's profitability ratios (as measured by its profit margin, ROA, and ROE). How do these ratios compare with those of its peers?

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Summary Introduction

To determine: The profitability ratios of the company and comparison of these ratio with the peers.

Introduction:

Profitability Ratio:

The profitability ratio is a measure of the profit-making ability of a company. This ratio determines how much the company is able to operate and utilize the assets of it.

Return on Assets:

The return on assets ratio shows the profitability of the business in relation to the other assets. This ratio determines the efficiency of a business to use the assets of the company.

Return on Equity:

Return on equity is a profitability ratio, which determines the profitability with the viewpoint of the shareholders. This finds out whether the fund of the shareholders are efficiently used or not to generate profit.

Explanation

The profitability ratios are the ratios, which determine the profit earning ability of a company. The profitability ratios are as follows:

  • Profit margin: The profit margin refers to the amount by which the profit from the sales exceeds the costs of the business.
  • Return on assets: This is a ratio, which determines the profitability of a company...

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