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Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977

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BuyFindarrow_forward

Fundamentals of Financial Manageme...

14th Edition
Eugene F. Brigham + 1 other
ISBN: 9781285867977
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 wnvcv.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 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 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 the specific term selected.

7. From the Google Finance site, use the DuPont analysis to determine the total assets turnover ratio for each of tire peer companies. (Hint ROA = Profit margin × Total assets turnover.) Once you've calculated each peer 's total assets turnover ratio, then you can use the DuPont analysis to calculate each peer's equity multiplier.

Summary Introduction

To determine: Thetotal assets turnover of each of the peer companies and the equity multiplier for each.

Introduction:

DuPont analysis:

The DuPont analysis is the analysis, which analyses the net profit margin, assets turnover, and financial leverage. This analysis was developed by the DuPont Corporation.

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 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.

Total assets turnover:

The total assets turnover ratio determines the efficiency of a company. This ratio evaluates the ability of a firm to generate sales from the use of its assets.

Equity multiplier:

The equity multiplier is a ratio, which is used to measure the financial leverage of the company. This is determined by dividing the total assets by the stockholder’s equity.

Explanation

Calculation of the total assets turnover of the peer companies:

The DuPont analysis to calculate the total assets turnover is done by using the following formula,

Totalassetsturnover=ReturnonassetsNetprofit

For the company A,

Substitute 21.09% for the net profit and 12.88% for the return on assets in the above formula.

Totalassetsturnover=12.88%21.09%=0.61

The total assets turnover of Company A is 0.61.

For the company I,

Substitute 15.30% for the net profit and 7.79% for the return on assets in the above formula.

Totalassetsturnover=7.79%15.30%=0.51

The total assets turnover of Company I is 0.51.

For the company C,

Substitute 20.02% for the net profit and 7.64% for the return on assets in the above formula.

Totalassetsturnover=7.64%20.02%=0.38

The total assets turnover of Company C is 0.38.

Calculation of the equity multiplier:

The formula to calculate the equity multiplier is,

Equitymultiplier=TotalassetsStockholder'sequity

For the company A,

Substitute $375,319 million for total assets and $134,047 million for stockholder’s equity in the above formula

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