Ratios Tell a Story 2007 Harvard Case Solution & Analysis

Return on Equity (ROE):

This ratio also has one of the most important role to play because it reflects that what level of profitably a company has earned from the capital of the stakeholder. This ratio is really important because by analyzing it, a stakeholder or aninvestor would know that either their money has been used in the proper direction or not.  Company number 7 (airline) has the highest return on equity ratio of about 40%. From the perspective of DuPontanalysis, it can be said that its ROE is higher because of relatively good asset turnover ratio.  The effort of this company in investing in the category of a fixed asset is quite good which needs to be appreciatedhere and is also doing a satisfactory job with the investor money (equity).

Current Ratio:

This ratio reflects the company's ability to pay the short term obligations or debt.  This ratio even indicates that how effectively the working capital management policy is working within the company. In this case analysis, the company number 2 has the maximum current ratio. Its current asset distribution is as follows: cash is around 35%, receivables of around 6% and since it is a service industry so it has no inventory. Moreover, it has small liabilities, which resulted in a higher current ratio.

Receivables Collection Period:

This is basically an important component of the cash conversion cycle. It can be defined as the number of days that are being taken to collect the payment from the customers. As the business grows and expansion is made, so companies allow the customers to take the product on credit. When the company collects its receivables before or even on time, it is definitely a good indication for the smooth flow of a business. This early collection period, even reduces the chances of facing a default customer. In this case, analysis the collection period of 4803 days is the highest among all the business.This belongs to the banking industry where receivables contributed around 71.5% of the total assets. The company having the low time period belongs to the service industry (internet and electric utilities), which is having around 23days collection period.

Inventory turnover:

This ratio also has an important role to play and reflects the performance of the company. This basically shows, how many times in a single year the company’s inventory has been replaced. Whenever the company’s inventory turnover ratio is high, it reflects the exceptional performance of the sales and marketing department that they have been successful in pushing the inventory up to a maximum extent. Similarly, when the inventory turnover is low, it raises the question about the company’s sales and marketing department. In this case, analysis the company number 2, 3, 4 and11 do not own any sort of inventory because they belongs to the services industry. Company number 1 and 12 has the highest inventory turnover ratio of 10.8 and 44 (times). These industriesaresupermarket andfast food respectively.

Gross Margin:

Gross margin is the ratio related to the gross profit of a company in relation to its entire revenue. It is basically the profitability ratio, which measures that what percentage of revenue is transformed into gross profit for the company. Whenever there is a higher gross margin so it shows that the company is doing a great job. Usually the software companies have the higher gross margin in comparison with the manufacturing firms. In this case, analysis the software industry has the gross margin ratio of around 91% and on the other hand the manufacturing firmhas the gross margin ratio of around 25%.

Dividend Payout:

Thisratio calculates the percentage of a firms overall net income which is given to shareholders of the company as it is in the form of dividends. This is basically a certain portion of the overall net income earned by the company.  Company number 9 (pharmaceutical) shows the highest dividend payout ratio of around 101%. This 101% is quite incredible because it means that a certain firm is paying more than what they actually earned for their shareholders. This kind of gigantic dividend payout ratio is only possible in the industry like pharmaceutical. Usually pharmaceutical companies pay huge dividends because there are many risks associated with this industry as compared to the utilities, telecom and etc.

Revenue Growth:

This revenue growth ratio also plays a major role because it projects the speed at which the business is actually growing, specifically in terms of revenue.Company number 7 which is an airline company reflects the highest 39% revenue growth. It even has the highest return on equity, which shows the exceptional growth of the industry and the company. This industry has grown quite fast, as equal to twice the annual growth of the global market with respect to the gross domestic product.

R & D Ratio:

It has been observed that companies which invest heavily in the research and development get exceptional returns. This ratio explains the net sales in relation tothe expenditure on research and development...............................

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