Statistical Tools for Financial Research, Research Paper Example

The subject of common size and ratio analysis will be reviewed from the perspectives of Drake & Fabozzi (2012), Gibson (2010), Mowen et al. (2013) and Sinha (2009). The applications of some of the common size analysis and ratio analysis will be applied to compare the organizational characteristics of Kimberly Clark Corporation and Atlas Copco.

Common Size Analysis

Vertical analysis or common size analysis reveals each of the line items which are a solitary year’s financial statements as a percentage of one of the items. This quantity is referenced as a based amount. The base amount which is referenced to the balance sheet is conventionally composed of all of the assets. The quantity the value of the assets is equivalent to the stockholder’s equity in addition to all of the liabilities. These numbers are combined with the totals for the income statement which is normally expressed as revenues or net sales (Drake & Fabozzi, 2012; Gibson, 2010; Mowen et al., 2013; Sinha, 2009).

In the comparison of two or more annual common size analysis, the modifications in the ratio of assets, equity and liability become manifest. In regards to the income statement, the modifications in the ratios of expenditures and revenues may be classified and identified. A common size analysis is conducted for the most recent years of the financial statements of Kimberly Clark Corp and Atlas Copco Group. In the case of Kimberly Clark, for the 20X1 balancing sheet each quantity is divided by 19,873 for 2012. The 20X0 balancing sheet is divided by $19,373 in 2011. In the case of the 20 X 1 income statement the common size proportions had been computed by divided $1,750 for the Kimberly Clark Corporation. In the case of the 20 x0 income statement the common size proportions had been computed by divided by $1,591 (Atlas Copco, 2012; Drake & Fabozzi, 2012; Gibson, 2010; Kimberly Clark Corporation, 2012; Mowen et al., 2013; Sinha, 2009).

In the case of Atlas Copco, for the 20 x1 balancing sheet each quantity is divided by $ 81, 149. The 20 x0 balancing sheet is divided by $75, 109. In the case of the 20 x 1 income statement, The 20 X 1 income statement is attained by dividing by $90,533. In the case of the 20 x 0 income statement, the dividend is $81,203. The ratio analysis is applied in order to assess the correlation among the financial elements. The proportions are applied in order to classify tendencies which occur during temporal intervals of two companies at a particular time. The ratio analysis of the financial statements is directed toward the important aspects of an enterprise. These items are solvency, profitability and liquidity (Atlas Copco, 2012; Drake & Fabozzi, 2012; Gibson, 2010; Kimberly Clark Corporation, 2012; Mowen et al., 2013; Sinha, 2009).

Liquidity

Liquidity proportions assess the capacity of an organization to repay its debts over a short term and to fulfill unanticipated cash requirement. The current ratio is which is also designated as the working capital proportion is the distinction between the present assets and the current liabilities.  The proportion assesses the capacity of an organization to provide repayment on its present obligations by applying its current assets. The current proportion is ascertained by dividing the present assets by the present liabilities (Atlas Capcom, 2012; Drake & Fabozzi, 2012; Gibson, 2010; Kimberly Clark Corporation, 2012; Mowen et al., 2013; Sinha, 2009).

Present ratio = Present assets / Present liabilities.

In the situation of Kimberly Clark, the present ratio is determined for the 20 X 1 by dividing the assets by the liabilities. In the case of the 2012 FY year, this is demonstrated as 19, 873/ 6, 091. In the case of the 20 X 0 present ratio n for FY 2011, this is demonstrated as $19,373/ $5, 397. The conventional benchmark assessment has been a ratio of 1: 1. Anything which is inferior to this value requires additional consideration. In the case of Atlas Copco, for the FY 2012 the 20 X 1 current ratio is $81, 149/ $24, 820. In the case of the 20 X0 present ratio for FY 2011, the present ratio is $75, 109/ 20, 946 (Atlas Copco, 2012; Drake & Fabozzi, 2012; Gibson, 2010; Kimberly Clark Corporation, 2012; Mowen et al., 2013; Sinha, 2009).

The receivables turnover is calculated by dividing the net credit sales by the average net receivables. The mean collection period which is also designated as the day’s outstanding is a variance of the turnover of receivables. This aspect computes the quantity of days which will be required in order to gather the mean receivables balance. This calculation is frequently applied. The average collection period is applied in order to determine the efficiency of an organization’s collection and credit policies (Drake & Fabozzi, 2012; Gibson, 2010; Mowen et al., 2013; Sinha, 2009)..

A benchmark rule is that the mean collection period should not be more extensive than the organization’s credit term intervals. The mean collection ratio is ascertained by dividing the number of days in a year which is 365 by the receivables turnover proportion. If the receivables are turned over five to seven times in a year and the credit term which is applied by the organization is sixty days, then the average is fair. In the case of a thirty day credit term, the receivables should be turned over ten to fourteen times during the course of a year.  The inventory turnover rate ratio is determined by dividing the costs of the goods which have been sold by the average inventory (Drake & Fabozzi, 2012; Gibson, 2010; Mowen et al., 2013; Sinha, 2009).

The mean inventory is ascertained by computing an organization’s initial inventory and aggregating the concluding inventory and dividing this sum by 2. In the event of the organization’s sales cycle being cyclical, the average may be computed on a reasonable schedule for the organization’s operations should be performed on a month to month or quarter to quarter basis.  The aspect of the day’s sales which are on hand is a variance of the inventory turnover perspective. The benefits of these applications are that a company’s well-being can be determined by the application of these formulas. The disadvantages are that if the organization does not consistently formulate financial statements year after year, the calculation may be inaccurate (Drake & Fabozzi, 2012; Gibson, 2010; Mowen et al., 2013; Sinha, 2009).

Profitability Ratio

The profitability ratio of a company is ascertained by assessing a company’s efficiency which includes its capacity or producing revenue and consequently, cash flow. The cash flow influences the organization’s capacity of acquiring debt and equity financing. The profit margin of a company is also designated as the operating production ratio. This calculation is applied in order to assess the organization’s capacity of converting its sales into revenue. In order to assess the profit margin, the profit margin must be assessed in comparison with the industry and the competitor’s statistics. The profit margin is computed by dividing the net revenue by the net sales (Drake & Fabozzi, 2012; Gibson, 2010; Mowen et al., 2013; Sinha, 2009).

Profitability margin = Net revenue/ Net sales

The turnover of assets ratio evaluates the efficiency with which an organization applies its assets. The value of the turnover may differ from one industry to the next. The asset turnover is computed by dividing the net sales by the mean total assets.

Turnover_assets = Net sales/ Mean total assets

The aspect of asset return is perceived as a comprehensive assessment of profitability. The ROA evaluates the extent that income has been created for every dollar of assets which is possessed by the company (Drake & Fabozzi, 2012; Gibson, 2010; Mowen et al., 2013; Sinha, 2009).

The return on assets aspect is a mixture of the profitability margin ratio and the turnover of assets ratio. The ROA can be computed by dividing the net revenues by the mean total assets or by performing a multiplication of the profitability ratio multiplied by the turnover of assets ratio.

ROA = Net revenue/ Mean total assets

The common stockholder’s equity return evaluates the extent that the net revenue was increased in relation to every dollar which had been invested of the stockholder’s equity. The common stockholder’s equity return is computed by dividing the net revenue by the mean stockholder’s common equity in fundamental capital structures which had common stocks which have been emitted (Drake & Fabozzi, 2012; Gibson, 2010; Mowen et al., 2013; Sinha, 2009).

The mean stockholder’s equity is the mean of the initial and concluding aspects of the stockholder’s equity. In a complicated capital formation, the net revenue is modified by performing a subtraction of the preferred dividend requisite and the aspect of the equity which is held by the common stockholders is computed by performing a subtraction of the par value of the stock which is preferred from the comprehensive stockholder’s equity. The return on the equity of the common stockholders is performed by the following equation:

Return on the equity which is held by the common stockholders= Net revenue – preferred dividends/ Mean   equity held by common stockholders

The share earnings or EPS is representative of the net revenue which has been realized for each of the shares of common stock. In a basic capital structure, the EPS is computed by dividing the net revenue by the quantity of mean weighted common shares which are outstanding (Drake & Fabozzi, 2012; Gibson, 2010; Mowen et al., 2013; Sinha, 2009)..

EPS = Net revenue/ Mean weighted common shares which are outstanding

The P/E ratio which is the price earnings ratio is cited in the financial press on a daily basis. The P/E ratio is representative of the investors’ anticipations with regards to stock price performance. In the circumstance that the ratio of price to earning is 15, that aspect is considered to be elevated. The price to earnings ratio is computed by dividing the market value of a common share by the earnings amount per share. In the event that the market price for an organization’s share had been $6.25 at the latter part of the 20 X 1 matrix and was $5.75 at the conclusion of 20 X 0, the ratio of price to earnings would be considered to be 39.1 (Drake & Fabozzi, 2012; Gibson, 2010; Mowen et al., 2013; Sinha, 2009).

The paying out ratio is the payout ratio is classified as the proportion of net revenue which is disseminated to stockholders in the aspect of dividends. The payout ratio is computed by dividing the cash dividends by the net revenue. In the circumstance of the cash dividends for an organization being $1,923,000 for 20 X 1 and $1, 296,000 for 20 X 0, the resulting payout ratio would be 23.6%. Organizations which are more stable have a greater likelihood of distributing a more elevated aspect of the earnings in the form of dividends. A number of organizations which are startups do not have the characteristics of paying dividends. It is of great significance to have an understanding of the organization and its approach when considering the payout ratio (Drake & Fabozzi, 2012; Gibson, 2010; Mowen et al., 2013; Sinha, 2009).

The payout ratio is = Earned cash dividends/ net revenue

The dividend’s yield is a demonstration of the aspect of an organization’s performance. The dividend yield assesses the measure by which the earned cash dividend is realized by investors with regards to a share of the common stock of the organization. The dividend yield is computed by dividing the dividends which are paid on each share by the market price for one common share of stock at the conclusion of a period.  The formula for dividend yield is:

Yield which is provided by the dividend = dividends which are paid per share/ market price for one common share of stock at the conclusion of the period.

A decreased dividend yield would be the indication of an organization which experiencing elevated indexes of growth which provides relatively small dividends and performs reinvestment of the earnings in the commercial operations of the organization. The decreased dividend yield could also be an indication of a slow period in the organization’s business cycle. The aspect of decreased dividend yields should be reviewed in order to provide that the investor is cognizant of the causal attributes for its minimal aspects (Drake & Fabozzi, 2012; Gibson, 2010; Mowen et al., 2013; Sinha, 2009).

Solvency Ratios

The solvency ratio is applied in order to assess extended term risk. This ratio is of significant interest to extended term creditors and shareholders. The solvency ratio is inclusive of the ratio of the liabilities to total assets. The ratio of the liabilities to total assets demonstrates the ratio of assets in organization that are held by creditors.  The liabilities to assets ratio is calculated by dividing the organization’s comprehensive debt and dividing it the comprehensive assets which are held by the organization. The ratio of times interest earnings is the capacity of an organization being able to fulfil its debt obligations as they come to maturity. The times interest earning ratio is computed by adding the interest which is realized prior to the interest (Drake & Fabozzi, 2012; Gibson, 2010; Mowen et al., 2013; Sinha, 2009).

Conclusion

The common size evaluation and the ratio analysis enable the organization to depict a financial picture of its wellbeing. These are the benefits. The detrimental aspect of the common size and the ratio analysis are discovered with organizations which do not regularly produce balance sheets, income statements and financial projections. In these circumstances the common size ratio and the ratio analysis may not provide an accurate picture of the organization’s well-being.

References

Atlas Copco (2012). 2012 annual report. Atlas Copco.

Drake, P. P., & Fabozzi, F. J. (2012). Analysis of financial statements. Hoboken, N.J.: John Wiley & Sons, Inc.

Gibson, C. (2010). Financial reporting and analysis: Using financial accounting information, 12^th edition. Mason, OH: South- Western Cengage Learning.

Kimberley Clark (2012). Form 10-K. Kimberley Clark Corporation.

Mowen, M., Hansen, D. & Heitger, D. (2013). Cornerstones of managerial accounting. Mason, OH; South- West Cengage Learning.

Sinha, G. (2009). Financial statement analysis. New Delhi: PHI Learning Private Ltd.