Financial Ratio Analysis – Income Statement

Profitability Ratios

Gross Profit Margin: This is a financial metric used to assess Kodak’s financial health by

revealing the proportion of money left over from revenues after accounting for the cost

of goods sold. This ratio serves as the source for paying additional expenses and future

savings. Since 1993, Kodak’s GPM has been declined .19 since 1993.

Operating Profit Margin (or Return on Sales): The financial ratio is widely used to

evaluate Kodak’s operational efficiency. This measure is helpful to management,

providing acumen into how much profit is being produced per dollar of sales. An

increasing ratio indicates the company is growing more efficient, while a decreasing

result could signal looming financial troubles. Kodak was on a declining trend but it

started to pick up at the turn of the 21st century. However, that was short-lived.

Net Profit Margin (or net return on sales): This shows Kodak’s after-tax profits per dollar

of sales. Looking at the earnings of a company often doesn't tell the entire story.

Increased earnings are good, but an increase does not mean that the profit margin of a

company is improving. For instance, if a company has costs that have increased at a

greater rate than sales, it leads to a lower profit margin. This is an indication that costs

need to be under better control. In 1993, Kodak had a negative NPM but that soon

increased up to its highest in 1998, but it decreased down to 1.99% in 2003, meaning

Kodak had a net income of .0199 for each dollar of sales.

Return on Total Assets: This is a measure of the return on total investment in the

enterprise. The ratio is considered an indicator of how effectively a company is using its
assets to generate earnings before contractual obligations must be paid. The greater a

company's earnings in proportion to its assets (and the greater the coefficient from this

calculation), the more efficiently the company is said to be using its assets. For the most

part, Kodak has maintained a relatively high return but in 2003, it was at 2.19%.

Return on Stockholder’s Equity: An indicator of corporate profitability, widely used by

investors as a measure of how a company is using its money. Kodak has had an

average of .15 but it in 2003, it was earning .0812 cents for every dollar invested into

Kodak. The average return is in the 12-15 percent range.

Earnings Per Share: The portion of a company's profit allocated to each outstanding

share of common stock. The trend should be upward and the bigger the annual

percentage gains, the better. Kodak has reached up to 4.38 back in 1999 but its EPS

has fallen down to .92 cents. This indicates how low Kodak’s profitability is in 2003.

Activity Ratios

Days of Inventory: Measures the inventory management efficiency. Fewer days of

inventory are better. This measure is one part of the cash conversion cycle, which

represents the process of turning raw materials into cash. It is very important that Kodak

not keep products with old technology. Based on its financial reporting, Kodak has done

well in lowering the time their products are in inventory but it should aim in reducing

their ratio from 48 days (inn 2003) to within a 3 week frame.

Inventory Turnover: A ratio showing how many times a Kodak’s inventory is sold and
replaced over a period. A low turnover implies poor sales and, therefore, excess

inventory. Kodak’s inventory turnover has steadily increased, thus showing strong sales.

Average Collection Period: the approximate amount of time that it takes for a business

to receive payments owed, in terms of receivables, from its customers and clients.

Technically, a shorter collection time is better but because Kodak’s buyers are usually

making large purchases, the period is longer than average.

Financial Ratio Analysis – Balance Sheet

Liquidity Ratio:

Current Ratio: This liquidity ratio measures Kodak’s ability to pay short-term obligations.

The ratio is mainly used to give an idea of Kodak’s ability to pay back its short-term

liabilities (debt and payables) with its short-term assets (cash, inventory, receivables).

The higher the current ratio, the more capable the company is of paying its obligations.

Kodak has always maintained a ratio above one, but between 1998 through 2002, its

ratio was below 1. This suggested that Kodak would be unable to pay off its obligations

if they came due anytime during that specific timeframe.

Quick Ratio: A gauge of a company's short-term liquidity. The quick ratio measures a

company's ability to meet its short-term obligations with its most liquid assets. The

higher the quick ratio, the better the position of the company. Kodak had a relatively

high ratio at the start of 1993 but it faltered for years but in 2003, the ratio began to

grow. The quick ratio is more conservative than the current ratio because it excludes

inventory from current assets. Inventory is excluded because some companies may

have difficulty turning their inventory into cash.

Working Capital: A measure of both a company's efficiency and its short-term financial

health. If Kodak’s current assets do not exceed its current liabilities, then it may run into

trouble paying back creditors in the short term. Working capital also gives investors an

idea of the Kodak’s underlying operational efficiency. Kodak has just recently begun to

have a positive working capital ratio after being in the negative for years.

Leverage Ratios:

Debt-to-assets ratio: The debt/asset ratio is a measure of a Kodak’s overall financial

health. It is determined by dividing the total worth of the assets by the total debt, or

liabilities. Kodak’s ratio has stayed below one, which shows investor’s that Kodak’s

assets are mainly being financed by equity, rather then debt.

Long-term debt-to-capital ratio: Another measurement of a Kodak’s financial leverage,

calculated as the company's debt divided by its total capital. Companies can

finance their operations through either debt or equity. The debt-to-capital ratio gives

users an idea of a Kodak’s financial structure, or how it is financing its operations, along

with some insight into its financial strength. The higher the debt-to-capital ratio, the

more debt the company has compared to its equity. Kodak’s ratio has varied between

0.782 to its lowest, 0.475. This tells investors whether Kodak is more prone to using

debt financing or equity financing and based on its history, it has financed mainly

through equity.

Debt-to-equity ratio: A measure of a Kodak’s financial leverage calculated by dividing its

total liabilities by stockholders' equity. It indicates what proportion of equity and debt the
company is using to finance its assets. A high debt/equity ratio generally means that a

company has been aggressive in financing its growth with debt. This can result in

volatile earnings as a result of the additional interest expense.

If a lot of debt is used to finance increased operations (high debt to equity), the

company could potentially generate more earnings than it would have without

this outside financing. If this were to increase earnings by a greater amount than the

debt cost (interest), then the shareholders benefit as more earnings are being spread

among the same amount of shareholders. However, the cost of this debt financing

may outweigh the return that the company generates on the debt through investment

and business activities and become too much for the company to handle. This can lead

to bankruptcy, which would leave shareholders with nothing. The debt/equity ratio also

depends on the industry in which the company operates. Kodak has maintained an

industry average in the past years but in 2008, the ratio indicated a negative equity.