Financial Ratio Analysis – BUS401

Learning Goal: I’m working on a accounting report and need the explanation and answer to help me
learn.
Ratio analysis provides another set of patterns to evaluate before deciding to buy or sell a
company’s stock. Ratios reveal more than just the past performance; ratios reveal how effectively
the company converts product sales into shareholder returns. Ratios provide a gauge for
comparison across time and across the industry (competitors), while removing the impact of size
differences. Would you rather invest in Company A, with $1.0 million in earnings, or Company B,
with $10.0 million in earnings? It’s hard to say. However, if Company A earns a ROA of 25%, while
Company B earns a ROA of 2%, the decision becomes clear.
Liquidity ratios provide clues to how effectively the company manages its cash collection cycle.
Asset turnover ratios reveal how efficiently the company uses its assets to generate profits. Debt
management ratios reveal how leveraged a company is, which provides an indication of future risk.
Taken together, a company’s ratios and its ratios compared to the industry competitors provide
important insight to the investment strength of the company’s stock. In this assignment, you will
review the trend in your chosen company’s financial ratios over the past 3 years and compare your
chosen company’s ratios to the average ratios from top competitors in the industry.
Write:
In your paper, address the following four parts in a Word document:
Part 1: (three to five paragraphs)
 Summarize the trends in your company’s ratio performance over the 3 most recent years. Be
sure to address the following ratios included in Appendix C:
o Profitability ratios: ROA, ROE, return on investment (ROI).
o Liquidity ratios: quick ratio, current ratio.
o Debt management ratios: long-term debt to equity, total debt to equity, interest
coverage ratio.
o Asset management ratios: total asset turnover, receivables turnover, inventory
turnover, and accounts payable turnover.
o Per share: book value per share.

Part 2: (two paragraphs)
 Interpret whether the trend for each ratio (listed in Part 1) is an improvement or a decline in
performance for the company.
 Create a table that lists each ratio as either a strength or a weakness in the most current
year, based on its trend and your interpretation.
 Determine the overall financial strength of the company based on the ratios identified as
either strengths or weaknesses.
o Consider all of the ratios discussed so far. Is the company’s strength the fact that the
debt management ratios are improving? Or is it that the liquidity ratios are

increasing? Is the company’s weakness that the turnover ratios are declining? Or is
the company’s weakness that debt management ratios are weakening?
o Categorize the company’s overall ratio performance as either strong, neutral, or
weak, based on your determination from the ratios.

Part 3: (one to two paragraphs)
 Compare your chosen company’s ratio performance to the industry competitor ratios in the
most recent year based on Appendix D. Be sure to address the following ratios included on
Appendix D:
o Profitability ratios: ROA, ROE, gross margin, and net margin.
o Liquidity ratios: quick ratio and current ratio.
o Debt management ratios: long-term debt to equity, total debt to equity, and interest
coverage ratio.
o Asset management ratios: asset turnover and inventory turnover.
 Create a table that lists each ratio as either higher or lower than the average ratio for the
competitors in the industry.
Part 4: (one paragraph)
 Categorize the company’s overall financial performance as either better than average,
average, or worse than average compared to the industry based on the ratios.
 Interpret which ratios are the most important and explain your reasoning.
 Justify your conclusion based on the table you created, your interpretation of which ratios are
the most important, and the company’s overall ratio performance compared to the industry
competitors.


 The Section 2: Financial Ratio Analysis paper
Must be two to three double-spaced pages in length including any tables or calculations (but
not including title and references pages) and formatted according to APA Style as outlined in
the Writing Center’s APA Formatting for Microsoft Word. Must include a separate title page
with the following:
 Title of paper in bold font
 Space should be between title and the rest of the information on the title page.
 Student’s name
 Name of institution (The University of Arizona Global Campus)
 Course name and number
 Instructor’s name
 Due date
 Must utilize academic voice.
 Must include a separate references page that is formatted according to APA Style as
outlined in the Writing Center.
 Must cite where the financial statement information comes from (i.e., Mergent)

 Note: Since this is Section 2 of the Week 5 final project, there is no need for an introduction
paragraph.
Requirements: 2 pages