FIN534 ratio analysis Sample Assignment

Ratio analysis is the process of examining and comparing financial information by calculating meaningful financial statement figure percentages instead of comparing line items from each financial statement (Armstrong & Vashishtha, 2012). Therefore, the financial information user uses ratio analysis to measure the risk, performanceand ability of the firm to finance its activities. This paper will discuss and analyze the current ratio, quick ratio, and profit margin, earnings per share, and price earnings ratio and how the investors and analysts can use this variable information to make best decisions.

Current ratio

The current ratio is a liquidity ratio that measures a company's ability to pay short-term obligations or those due within one year (Atanassov & Kim, 2009). This ratio tells investors and analysts how a company can maximize the current assets on its balance sheet to satisfy its current debt and other payables. The table below indicates that the Cisco system Inc. current ratio was declining fromthe year 2016 to the year 2017 and 2017 to 2016.when the ratio is more than one it means the company is health while having a less than one means the companies are unable to meet its short term liabilities.

Table 1

Quick ratio

The quick ratio is an indicator of a company’s short-term liquidity position and measures a company’s ability to meet its short-term obligations with its most liquid assets. Moreover, it indicates the company’s ability to instantly use its near-cash assets to pay down its current liabilities (Atanassov & Kim, 2009). This test is a quick test designed to produce instant results from the company’s performance. The analysis from the table below indicatesthe decline of acid test ratio from the year 2016 to 2017 and fromthe year 2017 to the year 2018. When the ratio is more than one, it means the company is health while having a less than one means the companies are unable to meet its short term liabilities.

Table 2

The profit margin ratio also called the return on sales ratio or gross profit ratio, is a profitability ratio that measures the amount of net income earned with each dollar of sales generated by comparing the net income and net sales of a company. Additionally, the profit margin ratio shows what percentage of sales are left over after all expenses are paid by the business. The analyses of Cisco system Inc. shows that the profit margin increased from the year 2016 to the year 2017 and declined from the year 2017 to 2018.when this ratio is very low it will tend toscare the investor.

Table 3

Earnings per share

This is a measure of how much profit a company has generated. Companies usually report their earnings per share on a quarterly or yearly basis. The analyses of the table below reveal that earning per share has been declining from the year 2016 to 2017 and year 2017 to 2018.when the earning per share is rising it will attract more investors while it is very low it will tend to scare the investors.

Table 4

The Price Earnings Ratio (P/E Ratio)

Thisis the relationship between a company’s stock price and earnings per share (EPS). It is a popular ratio that gives investors a better sense of the value of the company. As a shareholder, you want the company to earn back the price you pay as soon as possible. Therefore, lower price perearning stocks are more attractive than higher price per earning per stocks so long as the price per earnings ratio is positive. Also for stocks with the same P/E ratio, the one with faster growth business is more attractive. The table below shows analyses of Ciscosystem Inc. andit's earning per share have been increasing from the year 2016 to the year 2018.

Table 5

Risks

The negative effects of ratio analysis have several effects on the economy. These are macroeconomics, the firm’s risk,andthe clientrisk. When the company experience liquidity difficulties it causes money circulation in the economy to be limited and thus it may lead to the effect of prices going high and thus leading to inflation. The firm may risk losing its customer base as a result of failing to pay creditors on time. Moreover, the firm may result from reducing the number of work force to cut its labor cost;this will lead to losing of employment.

In conclusion, the Cisco system Inc. company is performing well considering its profitmargin, current ratio,and quick ratio analysis. Comparing the companies with its industry peer, it is doing relatively good compared to its competitors. Therefore, I recommend the client to purchaseCisco Systems stocks she will get her return on investments quickly since liquidity ratio and profitability is performance is perfect.

References

Armstrong, C., & Vashishtha, R. (2012). Executive stock options, differential risk-taking incentives, and firm value. Journal Of Financial Economics, 104(1), 70-88. doi: 10.1016/j.jfineco.2011.11.005 Armstrong, Ch.S., Va

Atanassov, J., & Kim, E. (2009). Labor and Corporate Governance: International Evidence from Restructuring Decisions. The Journal Of Finance, 64(1), 341-374. doi: 10.1111/j.1540-6261.2008.01436.x