Financial Ratio Analysis Report Essay Example | Topics and Well Written Essays - 1500 words

Financial Ratio Analysis Report - Essay Example Analysis and interpretation of financial statements helps to evaluate the financial position and performance of an enterprise. "GM generated record third quarter automotive revenue of $43.1 billion. The company also achieved record global third quarter sales of 2.39 million cars and trucks, up four percent compared to the third quarter 2006, driven by exceptionally strong demand in emerging markets and improved performance in developed markets. GM also set a number of third quarter sales records around the globe, including a 22 percent increase in GMLAAM, 16 percent increase in the GMAP region, and 15 percent gain in GME." (GM Reports third quarter financial results, 2007). Analysis of Fundamental Ratios and Trends Ratio analysis is one of the important tools used to develop and interpret the financial statements of a business entity. Ratios measure the efficiency of operation of a business unit. Moreover, it also helps to analyze the financial strength or weakness of a business entity. The economic growth of the company is steady and stable. Like all other areas, the company is highly concentrating in the area of accounting and finance also. Similarly, a well defined plan is maintained by the company for protecting its quantum of stock:- Ge1. Maintain control over the entire amount of raw material obtained from the suppliers. 2. Utilize these quantum of raw materials for the production of goods with appropriate control and without making any wastage. 3. After making the delivery of finished goods, company tries to restore the balance of material/ inventory for further process. General Motors, a leading automobile manufacturer is following a systematic procedure for evaluating the financial performance of the entity. The major ratios are being calculated by GM for the analysis and interpretation of financial measurement are current ratio, quick ratio, asset turn over ratio, inventory turn over ratio etc. Therefore, the fundamental accounting ratios of GM are depicted below- Estimated Financial Ratios of General Motors a. . Liquidity Ratios: 1. Current Ratio = Current Assets = $1,000 Current Liabilities$310= 3.2 times. 2) Quick ratio= Quick Assets/ Current liabilities= $385/ $310 = 1.2 times. b) Leverage Ratios- 1) Debt ratio= Total Debt/ Total Assets=$1,064/$2,000= 53.2% 2) Debt to Net worth ratio= Total Debt/ Tangible Net Worth= $1,064/$2250= 47.29%. c) Operating ratios- 1) Net sales to Total Assets= Net Sales/ Total Assets=$3,000/$2,000= 1.5 times. 2) Gross profit ratio= Gross profit/ sales= 1,500/3,000= 50% d) Profitability ratios: 1) Basic Earning Power-(BEP) = EBIT/Total Assets= $283.8/ $2,000= 14.2% 2) Return On Total Assets (ROA) = Net income to stock holders/ Total Assets= $113.5/ $2,000= 5.7% 3) Price Earning Ratio (PE) = Price per share/ Earnings per share= $23/2.27= 10.1 times. 4) Market ratio= Common Equity/ Shares out standing= $896/ 50= $17.92 5) Return On Common Equity (ROE) = Net income to