Financial Ratio Analysis Report
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A. Using the included attachment, JC Penney 3 year trend table of all financial ratios included under the following four categories of ratios (Liquidity, Efficiency, Leverage, and Profitability). Include a brief rationale for each ratio you have calculated. Also present in the table the industry average for each ratio.
b. Compare the ratios calculated against industry averages.
c. For each ratio calculated, write a paragraph interpreting the trends and identify strengths and weaknesses.
d. Assess the financial condition of the company.
e. Discuss other factors beyond the ratios that need to be considered in the assessment of the company's health.
f. Discuss how your assessment compares to what management is telling the shareholders in the annual report.
g. Identify possible problems you see this company facing in the next year that would require further analysis and exploration.
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Solution Summary
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STEP 1
A brief rationale for the ratios included:
Profitability ratios: These are ratios that measure how successfully JC Penney earns a return on investment:
This material is taken from the website: http://www.bizwiz.ca/profitability_ratio_calculation_formulas
The return on investment ratio provides a standard return on investor's equity.
The return on assets ratio provides a standard for evaluating how efficiently financial management employs the average dollar invested in the firm's assets, whether the dollar came from investors or creditors.
A low return on assets ratio indicates that the earnings are low for the amount of assets.
The gross profit margin ratio (or gross margin ratio) provides clues to the company's pricing, cost structure and production efficiency.
A low gross profit margin ratio (or gross margin ratio) indicates that low amount of earnings, required to pay fixed costs and profits, are generated from revenues.
A low gross profit margin ratio (or gross margin ratio) indicates that the business is unable to control its production costs." http://www.bizwiz.ca/profitability_ratio_calculation_formulas
Liquidity ratios:
Liquidity ratios measure the firm's ability to meet maturing short-term debts. This is the extent to which a firm can liquidate its assets to cover short term debts:
This material is taken from the website: http://www.bizwiz.ca/:
"The acid test ratio is also known as the quick ratio.
The acid test ratio measures the immediate amount of cash available to satisfy short term debt.
The current ratio is used to evaluate the liquidity, or ability to meet short term debts.
High current ratios are needed for companies that have difficulty borrowing on short term notice.
The generally acceptable current ratio is 2:1
Working capital is the liquid reserve available to satisfy contingencies and uncertainties.
A high working capital balance is needed if the business is unable to borrow on short notice.
Banks look at working capital over time to determine a company's ability to weather financial crises." http://www.bizwiz.ca/
Leverage ratios:
The leverage ratios indicate the long-term solvency of the entity.
This material is taken from the website: http://www.bizwiz.ca/
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The long term debt to shareholders equity ratio is also referred to as the gearing ratio.
A high gearing ratio is unfavorable because it indicates possible difficulty in meeting long term debt obligations.
Debt to Equity Ratio is also referred to as Debt Ratio, Financial Leverage Ratio or Leverage Ratio.
The debt to equity (debt or financial leverage) ratio indicates the extent to which the business relies on debt financing.
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