Ratios Tell A Story-2007 Harvard Case Solution & Analysis

INTRODUCTION

Each and every company has its own financial perspectives, preferences and strategies through which they are trying to achieve their desired business goals. Companies actually differ from various aspects like having their own pricing strategy, management policies, investment preferences, budgeting criteria and debt management strategy.  These strategies and priorities actually influence the final outcome of the company’s effort collectively. There are immense chances that two companies operating in the similar industry might possess dissimilar working standards and rules of business. They might have even the identical business or organizational structure, but might own a completely different financial structure. The performance and the difference in the structure can be evaluated with the help of ratio analysis technique. This ration analysis technique is based on the past statistics, which gives an exceptional interpretation of companies’ poor or extraordinary well performance. These ratios help the managers and industry experts to examine the connection and influence of several factors on each other. These ratios even help the managers to predict the future possibilities and outcomes for a certain company in a certain industry. In this new extraordinary competitive environment, these ratios still owns an exceptional importance.

RATIO ANALYSIS

The most common ratios of 13 different companies have been presented in Exhibit 1. Each company belongs to a different industry. The ratios will help us to identify which company belongs to which industry.

Return on Sales (ROS):

Return on sales helps the financial managers to evaluate the firm’soverall operational efficiency or it helps in measuring the net income that is earned for each dollar of sales. The net income statistics have been used in the particular case to measure the overall return on sales. This particular ratio helped in determining that how much profit has been earned through the overall sales of the company.  From the given data it can be seen and analyzed that out of these 13 companies, company number 2 possess the maximum return on sales ratio of around 23%. Moreover, this company has the good will of around 37.6% of their total assets (Software developer Adobe).

This good will of around 38% is the highest among all the companies. These relatively suitable figures reflect that this company number 2 has been quite successful in satisfying its customers and is able to maintain an exceptional good will or brand recall in the eyes of customers. Since this company didn’t own any inventory, so it definitely belongs to the service industry. Moreover the company number 3 have relatively a fine goodwill of 25% and also possesses a return on sales of around 25% (internet retailer E-bay). Usually the companies fall falls in the category of service industry have a higher profit margin and approximately no inventory to maintain.

Asset Turnover Ratio

Asset Turnover Ratio actually helps in determining the Company’s ability to make sales of its overall assets. Additionally, this ratio helps us in analyzing that if the company’s assets are being used in an effective manner to generate sales or not.  If the ratio is higher, so it definitely reflects the good performance of the company because this eventually leads to higher revenue generation for the company. In this scenario the company number 4 has the highest assets turnover ratio of around 3.2 times (specialized staffing services (Rotator Inc.)).Since this company does not have any sort of inventory, so, it belongs to the service industry. Moreover the company number 1 has the 2nd best asset turnover ratio.

Return on Assets (ROA):

This ratio simply tells that how much a company is getting as a return with respect to its total assets. In different industry, it has relatively a different role to play. In this case, analysis the company 4 has the maximum return on asset ratio of 20.4% (specialized staffing services (RotatorInc.)). It has also been mentioned above that this company belongs to the specialized staffing services industry.  In this case the second best return on asset ratio is owned by the company number 2 that is the Software DevelopmentCompany (Adobe).

 Financial Leverage:

This financial leverage ratio has an important role to play in analyzing the company’s financial performance. This ratio basically explains that how efficiently the company has been using the money which has been borrowed from different sources.  Firms which possess a habit of borrowing the money on a regular basis and if they are able to pay the amount on time, so there are immense chances that it may lead towards the bankruptcy. For example, if the company has the higher level of debts on its balance sheet so there are huge chances that bank might not be able to give them the further loan.  Sometimes these elements might help companies in saving the massive tax amounts. In this case scenario the company number 11 owns the highest financial leverage ratio among all the 13 companies.The best industry in this regard might be the commercial banking industry. The overall capital configuration shows that the company has 92% debt and only 8% of equity.................

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