Financial Ratios

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Financial ratios help identify strengths and weaknesses of a company through the analysis of financial statements and financial calculations. For this discussion, imagine you are a financial analyst for a company and your company is evaluating the purchase of another company, Hillside, Inc. This week, you’ll review a balance sheet and income statement for Hillside, Inc. and then calculate common financial ratios to evaluate the company’s financial performance.

Watch the following 2 videos as you prepare to respond to the discussion prompts:

“Financial Statements”

Transcript

“Financial Ratios”

Transcript

Access Financial Ratio Calculations, which is part of the Wk 4 Summative Assessment: Financial Analysis Calculations. Use this balance sheet information in it to choose 1 financial ratio that you will need to calculate for Hillside, Inc. and answer the following:

Which ratio did you choose? Explain what this ratio means.
What were the results of your calculation? Show your work to the class, including the formula you used and the data you input for your calculation

 

Sample Solution

Based on the provided resources, I will analyze Hillside, Inc. using a financial ratio. Here’s an example breakdown:

Chosen Ratio: Current Ratio

Explanation: The current ratio measures a company’s short-term liquidity, indicating its ability to meet current obligations with current assets. A higher ratio suggests better short-term financial health.

Formula: Current Ratio = Current Assets / Current Liabilities

Data from Financial Ratio Calculations (Wk 4 Summative Assessment):

Let’s assume the following data is available from the provided worksheet:

  • Current Assets: $5,165.27 (millions)
  • Current Liabilities: $2,955.20 (millions)

Calculation:

Current Ratio = $5,165.27 / $2,955.20 = 1.75

Interpretation:

Hillside, Inc. has a current ratio of 1.75. This means that for every $1 of current liabilities, the company has $1.75 of current assets. This indicates a moderate level of short-term liquidity. Hillside should be able to cover its short-term obligations with its current assets.

Note: This is just an example. The actual ratio you calculate will depend on the data provided in the Financial Ratio Calculations worksheet.

Additional Considerations:

  • Industry benchmarks: It’s important to compare Hillside’s current ratio to the average current ratio in its industry. This will provide a better understanding of how Hillside stacks up against its competitors.
  • Long-term solvency: While the current ratio assesses short-term liquidity, a more comprehensive analysis would involve calculating other financial ratios like the debt-to-equity ratio to understand Hillside’s long-term solvency.

By analyzing various financial ratios, you can gain valuable insights into Hillside’s financial health and make informed recommendations regarding its potential acquisition.

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