Project work using Ratio analysis Coursework Example

Project work using Ratio analysis
Student’s Name
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Date
Return on capital (ROC) =NOPAT/Total capitalization
Return on capital is one of the profitability ratios that indicate how efficient a company is when it comes to the generation of profits from the capital. The ratio compares the net operating profit to the company’s capital. The ratios give a clear indication to investors on the number of dollars in profit per each dollar of capital that is invested into the business (Baños-Caballero, García-Teruel, & Martínez-Solano, 2014). The ratio incorporates the net operating profit after tax, divided by the capitalization of that given firm. For Costco incorporation, the return on capital for the year 2013 and 2014 can be calculated as follows; Return on capital (ROC) =NOPAT/Total capitalization
For 2013, the operating profit after tax was $2061 million while in 2014; the value was $ 2088 million. The capitalization values for the year 2013 and 2014 were 12515 and 11012 respectively. Therefore, by use of the above formula, the ROC for the year 2013 was 0.19 and that of 2014 was 0.17.That means the profitability declined between these two years.
2014=2088/12515=0.17
2013=2061/11012=0.19
Return on Assets (ROA) =NOPAT/Total assets
Return on assets is one of the financial ratios that indicate the profits earned by the company in relation to the resources of that company. This ration is usually shown as a percentage. ‘It is the primary profitability ratio which indicates the amount of revenue that the company makes per dollar of its assets Bebchuk, Hirst, & Rhee, 2014.

The ratio is able to indicate the ability of an enterprise to generate profits leverage, instead of applying the leverage. Return on assets is very useful ration for the company because it gives an idea of how efficient the management utilizes the firm’s assets so as to generate revenue. It also indicates the capital intensity of the enterprise depending on the type of industry. Return on assets can easily be computed by dividing the after tax income of the enterprise by its total assets, then display the results as the percentage. For the Costco incorporation, the year 2014 and 2013 NOPAT in millions of dollars is 2058 and 2061 respectively, while total assets for the two consecutive years are 33024 and 30283 respectively. Therefore, by applying the formula; Return on Assets (ROA) =NOPAT/Total assets, the ROA for Costco corporation on the year 2014 is 6.23% and for the year 2013 is 6.81%.Therefore, there is the slight decline in the ratio from the year 2013 to the 2014 financial period. (Baños-Caballero, García-Teruel, & Martínez-Solano, 2014)
2014=2058/33024=6.23%
2013=2061/30283=6.81%
Return on Equity (ROE) =Net income/equity
Return on equity is a profitability ratio that indicates the ability of a company to make profits from investments of shareholders in that particular company. It shows the returns each dollar from the equity of common stock generates. Return on equity also indicates how effective management is when it comes to utilizing equity financing so as to finance the growth and operations of the company.ROE is one of the crucial profitability metrics and financial ratios. The ratio is termed as the mother of other ratios because it can be obtained directly from company’s financial statement. The ROE offers a very significant signal regarding the financial success of a company. It can be a good indication of whether the profitability of a company is growing without the addition of equity capital. In the increase of ROE gives an important hint on whether the shareholders are receiving more for their money from the management. ROE is calculated by dividing net income by the company’s equity.
Return on Equity (ROE) =Net income/equity
For the Costco incorporation, the net income for the year 2014 and 2013 is $2058 and $2061respectively.The equity for these two years was 12515 and 11012 respectively. The return on equity for the year 2014 and 2013 was 16.44% and 18.72%.
2014=2058/12515=16.44%
2013=2061/11012=18.72%
Asset Turnover=Revenues/Total assets at start of year
The asset turnover refers to the ratio of value of the firm’s revenues or sales that is generated relative to assets value. The ratio is used as an indicator of the company’s efficiency in assets deployment when generating revenue. The company with high turnover ratio usually has high performance and generates higher profits. The higher ratios generally imply that more revenue per dollar is generated by the company. The ratio is calculated by dividing the total revenues by total assets at the beginning of the year. Asset Turnover=Revenues/Total assets at start of year. The total revenues for The Costco corporation for year 2014 was 112640 and that of year 2013 was 105156.Additionally, the total assets for year2014 was 33024 and that of previous year was 30283.Using the formula above, the turnover ratio for year 2014 was 3.41 and that of year 2013 was 3.47.The two ratios indicates that the performance of the company for the two years was almost the same, but slightly declining as time goes by.
2014=112640/33024=3.41
2013=105156/30283=3.47
Inventory Turnover=Cost of sales/average inventories
Inventory turnover is a measure of the number of times a business sells its stock in a given period of time, usually one year. The firms mainly use this turnover to assess the competitiveness, projected revenues and figure out their financial success in the industry. A high inventory turnover is preferred because it gives a clear indication that goods of that particular business are sold relatively quicker such that they have no chance of going bad or deteriorating. The computation of inventory turnover involves division of cost of sales by average stock. Inventory Turnover=Cost of sales/average inventories. The Costco in year 2014 and 2013 has cost of sales amounting to $98458 and $91948 respectively. The average inventory for the two years amounted to $8456 and $7894 million respectively. Therefore, by using the formula, the inventory turnover for year 2014 is 11.64 and 11.65 for year 2013.That shows that the inventory turnover for the company in the two years remains almost the same, but slightly declined in the year 2014.
2014= (98458/8456) =11.64
2013= (91948/7894) =11.65
Receivables turnover=Revenues/average trade receivables
The receivable’s turnover or the ratio of debtor’s turnover is one of the measures of accounting used to measure the efficiency of a company in collecting debts as well as extending credits. It is an activity ratio that shows how effective the company utilizes its assets. A high receivables turnover is desirable because it would imply that the firm operates on the cash basis and has efficient credit extension and collection period. The formula for calculating receivables turnover is; Receivables turnover=Revenues/average trade receivables. The Costco Corporation had revenues amounting to $112640 in the year 2014 and $105156 in the year 2013.On the other hand, the average trade receivables for the two years amounted to 1148 and 1201 respectively. Therefore, the receivables turnover for the year 2014 was 98.12 and 87.56 for the year 2013.The ratios indicate that there was an improvement in terms of efficiency n debt management in the year 2014 compared to the 2013 financial period.
2014=112640/1148=98.12
2013=105156/1201=87.56
Profit margin=Net income/sales
The profit margin ratio or return on sales ratio shows the amount of net income which the firm earn per dollar of sales that are generated. It is measured by comparing net income by net sales of an enterprise. ‘Similarly, profit margin ratio indicates the sales percentage that is left after the business pays for all the expenses’ (Bebchuk, Hirst, & Rhee, 2014). The ratio is so applicable to creditors and investors especially when they want to measure how efficient the enterprise is able to convert sales into income. The investors ensure that the returns are high in order to distribute dividends. On the other hand, creditors ensure that the firm has sufficient profits so that it can readily pay back the loans. The internal management of a company applies profit margin ratio when setting performance goals for the future. The profit margin is calculated by dividing net income by sales. Profit margin=Net income/sales. The Costco Corporation in the year 2014 had a profit margin of 1.83% and in the year 2013, it had 1.96% of profit margin. There is a slight decline in profit margin from the year 2013 compared to that of the year 2014(Bebchuk, Hirst, & Rhee, 2014).
2014=2058/112640=1.83%
2013=2061/105156=1.96%
Operating profit margin=NOPAT/Sales
Operating profit margin is one of the measures of profitability. It is computed from the values derived from the operations of the company or income statement. The margin is usually shown as a percentage. The ratio is a good indicator because it shows how effective the firm is able to manage expenses. It is able to reveal the profit that is returned to the firm after covering all the variable and fixed expenses. The operating profit margin ratio is computed by dividing the net operating profit after tax by sales. In the year 2014 and 2014, the Costco Corporation had operating profit margin ratio of 2.86% and 2.9%respectively.That means there was the slight decline in the ratio for the in the year 2014.
2014= (3220)/112640=2.86%
2013= (3053/105156=2.9%
Long term debt ratio=long –term debt+ value of leases/long term debt+ value of leases+ preferred equity+ common equity
Long term debt ratio indicates the company’s financial leverage. It computes the firm’s proportion of long term debt relating to its available capital. The investors use the long term debt ratio when they want to analyze the risk exposure of the company (Bebchuk, Hirst, & Rhee, 2014). Those firms that fund the greater portion of their capital through borrowing are considered riskier than those with relatively lower leverage ratios. The ratio is computed as follows; Long term debt ratio=long –term debt+ value of leases/long term debt+ value of leases+ preferred equity+ common equity. Costco incorporation has the long term debt ratio of 0.59 in the year 2014 and 0.58 in the year 2013.That means that the firm is riskier to for investors in 2014 than in the year 2013.
2014=5093/5093+3549.2=5093/8642.2=0.59
2013=4998/4998+3549.2=4998/8547.2=0.58
Long term debt to equity ratio=long term debt +value of leases/preferred equity+ common equity
The long term debt to equity ratio is a financial ratio that a firm used when determining the leverage it has taken. The high ratio implies that the firm is suffering a higher risk of bankruptcy. The reason for the situation is that a company may not be able to meet interest expense on the debt in case its cash flows reduce. The ratio is applied when comparing the firm’s leverage ratio with that of the competitors. The formula for the ratio is; Long term debt to equity ratio=long term debt +value of leases/preferred equity+ common equity. The Costco Corporation in the year 2014 had the long term debt ratio of 1.4 and the figure remained the same even in the year 2013.
2014=5093/3549.2=1.4
2013=4998/3549.2=1.4
Times Interest Earned (TIE) =EBT/interest expense
Times interest earned is one of the financial ratios used to measure the ability of a company to pay out its debt obligations. It indicates the number of times the company is able to cover all its interest charges on a pre-tax earnings basis. The time’s interest earned ratio is applicable on the side of creditors. When this ratio is high, it means there is a guarantee for periodical interest income for the lenders. The time’s interest earned ratio is computed by dividing the earnings before tax by interest expense. Times Interest Earned (TIE) =EBT/interest expense. The Costco Corporation had the time’s interest earned ratio of 28.5% in the year 2014 and 30.84% in the year 2013, meaning there is the slight decline in 2014.
2014 =3220/133=28.5%
2013=3053/99=30.84%
Cash coverage ratio=EBT+ Depreciation and Amortization/Interest Expense
The cash coverage ratio is one of the indicators of liquidity of a company. It measures the ability of a company to pay out the current debts. The ratio indicates the firm’s cash or cash equivalent that is available. The ratio is applicable when the cash available to pay out borrowers interest expense. The desired ratio is expected to be greater than 1:1.The ratio is calculated by dividing the sum of EBIT and depreciation and amortization by interest expense. The Costco corporation had cash coverage ratio of 40.9 in the year 2014 and 41.3 in the year 2013.That means that cash available to pay out the borrowers had reduced slightly in the year 2014 from the year 2013.
2014=7845+3220/ 113 =40.9
2013=7141+3053/ 99 =41.3
Net working Capital to total assets ratio=Net working capital/total assets
The net working capital to total assets ratio indicates the potential of the company in terms of the net reservoir of cash. In case the assets of a firm exceed the liabilities, the net working capital is usually positive. The ratio shows the ability of an enterprise to meet its short term financial obligations. The ratio is important to a company because when there is a positive sign in the ratio, it shows that the firm is improving with time. The negative sign, on the other hand, shows that the company’s amount of working capital is declining. The ratio is computed by diving net working capital to total assets. For the Costco Corporation, the year 2014 and 2013 ratios were 37.9% and 36.4% respectively. The two ratios have positive sign meaning that the amount of working capital is increasing.
2014=12515/33024=37.9%
2013=11012/30283=36.4%
Current ratio=current assets/current liabilities
The current ratio measures the current assets of a company against the current liabilities of the same company. The ratio is a good indication for the firm whether it is capable of paying out the short term liabilities in case of an emergency by liquidating its current assets. The high current ratio is desirable because it shows that a company can readily pay out short term obligations without a chance of cash squeeze. The ratio is calculated by dividing the current assets by current liabilities. For Costco Corporation, the year 2014 recorded a current ratio of 8.9 and the previous year had 11.9.That means the ability of the company to meet short term obligation reduced in the 2014 financial period (Delen, Kuzey, & Uyar, 2013).
2014=127588/14412=8.9
2013=157840/ 13257=11.9
Quick (Acid –test) ratio=cash and cash equivalents+ current other investments+ trade receivables/current liabilities
This ratio usually matches the liquidated parts of current assets with current liabilities. The quick ratio is used evaluate if the firm has enough assets to convert into cash in order to pay bills. It makes use of cash and marketable securities as well as the account receivables. The ratio is mostly applied by creditors to evaluate whether the company is able to pay the borrowed amount in a timely manner. The quick ratio is calculated as follows. Quick (Acid –test) ratio=cash and cash equivalents+ current other investments+ trade receivables/current liabilities. The Costco Corporation’s year 2014 quick ratio was0.52 and that of the year 2013 was 0.55.Therefore that shows that the ability of the firm to meet short term obligations was improving between 2013 and 2014.
2014=5738+1577+1148/14412=0.52
2013=4644+1480+1201/13257=0.55
Cash ratio=cash and cash equivalents/current liabilities
The cash ratio is used to measure the firm’s liquidity. More so, it shows the relationship that lies between cash and cash equivalent with the company’s current liabilities. When cash ratio is more than 1, there is a clear indication of inefficiency when it comes to cash utilization to generate profits in the business. Therefore, the desired cash ratio for the company s one that is less than 1.Cash ratio is computed by dividing the cash and cash equivalent by current liabilities. Cash ratio=cash and cash equivalents/current liabilities. For the Costco corporations, the cash ratio for the year 2014 is 0.4 and that of 2013 is 0.35.Therefore, there is an indication that the company is able to utilize cash effectively because both the ratios are less than 1.However, the level of effectiveness is declining in the year 2014 compared to the year 2013.
2014=5738/14412=0.4
2013=4644/13257=0.35
Payout ratio=dividends/earnings
Payout ratio refers to the proportion of firm’s earnings that is distributed as dividends to the shareholders. The ratio indicates the company’s sustainability when it comes to dividends payments. The lower payout ratio is desirable to higher payout ratio in any organization (Delen, Kuzey, & Uyar, 2013). The ratio is computed as; Payout ratio=dividends/earnings. The Costco Corporation had a payout ratio of 21% in both 2013 and 2014 financial periods. The ratios are preferable since they are generally low.
2014=438.69/2060=21%
2013=435.74/2040=21 %
Plowback ratio (retention) =earnings-dividends/earnings
The plow-back ratio is one of the financial ratios used to measure the retained amount after dividends payment. It is an indicator of how much profit that the business retains instead of paying it out to investors. The high retention ratio is an indication of the company’s belief that there would be high growth periods that would favour the firm in future. The retention ratio is calculated as; Plowback ratio (retention) =earnings-dividends/earnings. Costco Corporation had retention ratio of 79% in both 2013 and 2014 financial periods. With such high plow-back ratios, the company expects to grow more in the future.
2014=2060-438.69/2060=79%
2013=2040-435.742040=79%
Sustainable Growth Rate = Plowback X ROE
Calculating the sustainable growth rate of this company, the plowback ratio and Return on Equity (ROE) are required. In other words, the two indicate a company’s profitability and the firm’s earnings per share in percentage. With the Plowback ratio and ROE, the company ought to investigate how fast the shareholders are investing and the growth of the investment yearly. However, it should be noted that the ratio cannot be reviewed if the company had losses during the year that is being reviewed. Also, it is vital to study this growth rate so that the company can circumvent straining economic resources and overstretching their financial influence. The company’s ROE was 16.44% (0.1644) and 18.72% (0.1872) in 2014 and 2013 respectively. The Plowback ratio both in 2014 and 2013 was 79% (0.79). 2014= 0.1644 X 0.79= 12.99%
2013= 0.1872 X 0.79= 14.79%

References
Baños-Caballero, S., García-Teruel, P. J., & Martínez-Solano, P. (2014). Working capital management, corporate performance, and financial constraints. Journal of Business Research, 67(3), 332-338.
Bebchuk, L. A., Hirst, S. P., & Rhee, J. (2014). Toward board declassification in 100 S&P 500 and Fortune 500 companies: Report of the SRP for the 2012 and 2013 proxy seasons. Harvard Law School Forum on Corporate Governance and Financial Regulation.Delen, D., Kuzey, C., & Uyar, A. (2013). Measuring firm performance using financial ratios: A decision tree approach. Expert Systems with Applications, 40(10), 3970-3983.