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the financial statements of Abbott lab. The data is in fractions while in the statements absolute amounts have been given You are given final last chance to submit valid improved work by using the statements available on companys website; otherwise your work will be rejected in this semester.
You also did not properly analyze the results of your calculated ratios. Only to tell that one ratio is increasing / decreasing is not the analysis. You are required to properly analyze which ratio is good/bad for which company along with proper reasons Guidelines for Interpretation of Ratios The following guidelines will help you to understand what interpretation means and how it should be done. What does interpretation of ratios mean? Interpretation means explanation of the ratios results. It does not mean definition of ratios rather it should enable the readers to understand what the calculated ratio indicates and what the trend for that particular ratio is. It should cover following steps: Step # 1) Result understanding: i.e. what does the answer derived from ratio calculation indicates? You have to
critically analyze the result of calculated ratio by explaining the relationship of numerator with that of a denominator.
In interpretation of ratios, you are required to interpret the result of ratio in particular year, e.g. If result of current ratio is 1.1:1 in 2010 then it means that if the company has the Current Liabilities worth Rs 1 then the company has Rs 1.1 to pay off its current liabilities. Current Ratio = Current Assets / Current Liabilities Result figure always represent numerator e.g. if result is 1.1 then it will present the current assets where the current liabilities are assumed as 1, (as current ratio unit is in times). If any ratio is calculated in %ages then base item is supposed as 100 instead of 1.
Ratio Analysis
Note Financial statement analysis of Abbot Laboratories because due to facing difficulty in conducting ratio analysis and non availability of the Pfizers financial statements for ratio analysis and that I have taken approval from your Course Instructor for doing this.
Following data and analysis is not acceptable at all. The data you are using for analysis has been taken form the financial statements of abbot laboratories available on its website
Ratio analysis includes method of interpreting to access the performance of any organization. The basic input ratio analysis is profit and loss account and balance sheet. Ration analysis of any organization is in interest of its creditors, shareholders and of its management as well. Both existing and prospective customers are interested in the ratio analysis of organization Ratio analysis is a valuable for management in the discharge of its basic functions such as planning, forecasting, control etc. these ratios shows relationship with the functioning of the business and helpful for controlling cost of goods manufactured. The great advantage of ratio analysis is that it reduces raw data of widely varying to a common comparative basis. Thus, ratio analysis is the most meaningful to compare financial information regarding a company.
a) Liquidity Ratios
Current Ratio Current Ratio = Current assets / Current liabilities
Current asset = Cash and Short Term Investments + Net Receivables + Total Inventories + Progress Payments & Others + Prepaid Expenses + Other Current Assets And Current Liabilities = Short Term Debt & Current Portion of Long Term Debt + Accrued Payroll + Income Taxes Payable + Dividends Payable + Other Current Liabilities Interpretation An increase in the current ratio represents improvement in liquidity position of company while a decrease in the current ratio indicates that there has been deterioration in liquidity position of the company. Current ratio in 2010 is decreasing as compared with 2008 and 2009. It should be improved. Decreasing activity is not suitable for the labs it should be increase for batter results.
Acid Test Ratio Acid Test Ratio = (current assets inventories - Prepayments / current liabilities
Current asset = Cash and Short Term Investments + Net Receivables + Total Inventories + Progress Payments & Others + Prepaid Expenses + Other Current Assets Inventories Current Liabilities = Short Term Debt & Current Portion of Long Term Debt + Accrued Payroll + Income Taxes Payable + Dividends Payable + Other Current Liabilities
Current asset = Cash and Short Term Investments + Net Receivables + Total Inventories + Progress Payments & Others + Prepaid Expenses + Other Current Assets And Current Liabilities = Short Term Debt & Current Portion of Long Term Debt + Accrued Payroll + Income Taxes Payable + Dividends Payable + Other Current Liabilities Interpretation Working capital should increase which will show that there is increase in current assets. But here working capital is decreasing in 2010 as compared with 2008 as well as 2009. It should be improved. It should be increased for the batter results of labs.
b) Leverage Ratios
Times Interest Earned
Time interest earned ratio = Earning before interest and taxes / Interest
Interpretation Time interest earned ratio also called interest coverage ratio, measure the ability to make contractual interest payments. The higher the value the better able the organization is to fulfill its interest obligations. Here Time interest earned ratio is decreasing in 2009 and 2010 as compared with 2008. It should be improved. It is not batter for the company.
Debt Ratio Debt Ratio = (Total Debt/ Total assets) *100 2008 RS in Billion =8.71 / 40.47 * 100 =21.52 % 2009 RS in Billion =11.27 / 51.64 * 100 =21.82 % 2010 RS in Billion =12.52 / 58.81 * 100 =21.28 %
Total assets = Current Assets Total + Long Term Receivables + Investment in Unconsolidated Subsidiaries + Other Investments + Property, Plant & Equipment Net + Property, Plant & Equipment Gross + Accumulated Depreciation + Other Assets + Tangible Other Assets + Intangible Other Assets Interpretation The debt ratio measures the proportion of total assets by creditors. The greater the ratio the greater the amount of other peoples money being used to generate profits. The higher the ratio greater the degree of indebtedness a more financial leverage. Here debt ratio is increasing in 2009 as compared with 2008 which is not favorable and again decreasing in 2010 as compared with 2009. Debt / Equity Ratio Debt / Equity Ratio = (Total debt / Total shareholders equity) *100
Debt to Tangible Net worth Ratio Debt to Tangible Net worth Ratio = (Total debt /Tangible fixed Assets) *100 2008 RS in Billion 8.71 / 40.47 * 100 =21.52 % 2009 RS in Billion 11.27 / 51.64 B* 100 =21.82 % 2010 RS in Billion 12.52 / 58.81 * 100 =21.28 %
Total Capitalization Ratio Total Capitalization Ratio = Long term debt/ (long term debt + shareholder equity) * 100
Long term assets versus Long term Debt = (long term assets/ long term debt) * 100
Return on Operating Assets Operating Assets Turnover = (profit / operating assets) * 100
2008 RS in Billion
2009 RS in Billion
2010 RS in Billion
c) Profitability Ratios
Net Profit Margin Net Profit Margin = Net Profit / Net Sales *100
2008 RS in Billion
2009 RS in Billion
2010 RS in Billion
Interpretation Return on assets also called the return on investment. It measure the overall effectiveness of management in generating profit with its available assets. The higher the firms return on total assets, the better will be the performance. Here ROA in 2010 is increased as compared with 2008 and 2010. It is better for the labs. DuPont Return on Asset: ROA = Net Income/ Sales Sales / Total Assets 2008 2009 2010
4.73 B / 29.53 B * 5.75 B / 30.76 B * 30.76 B / 4.63 B / 35.17 B * 29.53 B / 40.47 B 51.64 B 35.17 B / 58.81 B =0.1168B =0.1113B =0.0787B
Interpretation Return on assets also called the return on investment. It measures the overall effectiveness of management in generating profit with its available assets. The higher the firms return on total assets, the better will be the performance. Here ROA in 2010 is increased as compared with 2008 and 2010. It is better for the labs.
Interpretation Operating profits are pure because it measure only the profits earned on operations and ignore interest, taxes & preferred stock dividend. Higher operating profit margin is preferred. Operating profit margin is decreased in 2010 as compared with 2008 and 2009. It should be improved and it is not a batter signal for the labs. Return on Operating Assets Return on Operating Assets = (net income / operating assets)
Return on Total Equity = (net profit after tax/ total equity) * 100
Interpretation ROE measures return earned on common stockholders investment. The better the ROE, the better will be performance. ROE is decreased in 2010 as compared with 2008 and 2009. It should be improved. Decreasing activities of ROE is not batter for the labs. Gross Profit Margin Gross Profit Margin = Gross Profit / Net Sales * 100 Gross Profit = Sales Cost of Goods Sold 2008 RS in Billion 17.06 / 29.53 * 100 =57.77% 2009 RS in Billion 17.62 / 30.76 *100 =57.28% 2010 RS in Billion 20.50 / 35.17 * 100 =58.28%
Interpretation
Gross profit margin measures the %ge of each sales rupee remaining after the organization has paid for its goods. The higher the gross profit margin, the better will be for business. Here Gross profit margin is decreased in 2009 as compared with 2008 but it is increased in 2010 as compared with 2008 and 2009. It is favorable and good for the labs
d) Activity Ratios
Total Assets Turnover Total Assets Turnover = (Income/ total assets) * 100
Interpretation Higher the total asset turnover more efficiently its assets have been used. This measure is probably of greatest interest to management, because it indicates operations have been financially efficient. Here Total asset turnover is decreasing in 2010 as compared with 2008 and 2009 which is not a good sign for the labs.
Fixed Assets Turnover Fixed Assets Turnover = (Income/ fixed assets) * 100
e) Market Ratios
Dividend per share DPS = Dividends paid to Shareholders / Average common shares outstanding
Earning per Share Earning per Share = Net Income/ No. of shares issued
2008 RS in Billion
2009 RS in Billion
2010 RS in Billion
Interpretation Earnings per share (EPS) the earnings returned on the each share. Higher eps is good but here is EPS is decreased in 2010 as compared with 2009 which is not good for the labs.
Price/Earning Ratio Price/Earning Ratio = Market price per share/ Earning per share