• 3— Financial ratio analysis for Time Warner. a. Find financial ratios for Time Warner for the last 1-3 years and its major competitor for the last year in the Internet.

  o Present the ratios as a table(s) in your project.

  o Write about 2 pages of analysis of the ratio results that you found. Compare the ratio results against the industry or main competitor. In your analysis you should answer the following questions:

   How liquid is the company?

   How is the company financing its assets?

   Is management generating a substantial profit on the company’s assets?

  This is how someone answered this exact question for Microsoft. This is an example of what I need.

  EXAMPLE:

  Ratio analysis is the powerful tool of financial statements analysis. A ratio is define as “the indicated quotient of two mathematical expressions” and as “the relationship between two or more things” ie: Ratio is the numerical relationship between two inter-related numbers or items. The absolute figures reported in the financial statement do not provide meaningful understanding of the performance and financial position of the firm. Ratio helps to summaries large quantities of financial data and to make qualitative judgment of the firm’s financial performance.

  Significance Of Ratio Analysis

  Ratio analysis is of great help of commercial bankers, trade creditors and institutional lenders. They judge the ability of borrowing enterprises by observing various ratios like the current ratio, acid test ratio, and turnover of receivables, inventory turnover, and coverage of interest by the level of earnings.

  Ratio analysis also helps long term creditors in knowing the ability of a borrowing enterprises to pay interest principal in case earnings decline they find valuable the ratios of total debt to equity and total debt to total assets. Investors in shares judge the performance of the company by observing the per share into ratios like earnings per share, book value per share, market price per share, dividends per share etc.

  Ratio analysis helps to appraise the firms in the term of there profitability and efficiency of performance, either individually or in relation to other firms in same industry.

  Similarly, the ratio analysis may be able to locate the point out the various areas which need the management attention in order to improve the situation. E.g. Current ratio which shows a constant decline trend may be indicate the need for further introduction of long term finance in order to increase the liquidity position.

  As the ratio analysis is concerned with all the aspect of the firm’s financial analysis liquidity, solvency, activity, profitability and overall performance, it enables the interested persons to know the financial and operational characteristics of an organization and take suitable decisions.

  It facilitate inter firm comparison. It reveals how well it serves. As a useful aid in financial forecasting future trends can be known in advance based on ratios relating to part sales, profits and financial.

  It facilitates comparative study of the performance and, progress of a firm over a period of years. Such a study will reveal the directions in the firm is moving.

  It serves as a useful tool for cost control. It reveals now efficiently a firm is managed and how effectively its assets are utilized.

  It serves as a means of communication to report on the strength and financial standing of a firm to the management and external parties.

  It facilitates trend analysis. It reveals the progress or decline of a firm over the years.

  It serves as diagnostic too to assess the financial health of a firm. It throws light on its liquidity, solvency, profitability and capital gearing position.

  1.Liquidity Ratios (Short-Term Solvency Ratio)

  
  

  The ability of a firm to meet its current liability is referred to as liquidity.Thus liquidity ratios are also known as short-term solvency ratios.These ratios indicate the ability of the firm to meet its current obligations maturing within a period of one year out of its current resources.These ratios help in measuring the short term solvency position of the firm.Liquidity ratios include :

  
  

  Current Ratio/Working Capital Ratio – Current Ratio is computed to measure the short term financial position of the firm.It is a relationship between current assets to current liabilities. . Current ratio indicates the availability of current assets in rupees for every rupee of current.

  Current Ratio = Current assets / Current liabilities

  Current assets include cash and those assets which can be converted in to cash within a year,such marketable securities, debtors and inventories. ie Current Assets= Cash in hand & bank + B/R + Short-term investments ( Marketable Securities) + Debtors less provision + stock (Raw materials + Work-in-progress + finished goods ) + Prepaid expenses + Accrued Income.

  All obligations within a year are include in current liabilities ie Current liabilities= Creditors + Bill Payable + Cash credit & Overdraft from a bank + Provision for taxation + Proposed Dividend + Unclaimed Dividend + Outstanding Expenses + Unearned Income + loan payable within a year.

  Liquid Ratio/Quick ratio – Quick ratios establish the relationship between quick or liquid assets and liabilities. An asset is liquid if it can be converting in to cash immediately or reasonably soon without a loss of value. Cash is the most liquid asset .Other assets which are consider to be relatively liquid and include in quick assets are debtors and bills receivable and marketable securities. Inventories are considered as less liquid. Inventory normally required some time for realizing into cash. Their value also be tendency to fluctuate.

  The quick ratio is found out by dividing quick assets by current liabilities It indicates the relationship of liquid assets to current liabilities.The ratio tries to ascertain the liquidity position of the firm.Liquidity refers to ability of the firm to convert current assets into cash.

  Liquid Ratio = Liquid Assets /Current liabilities

  Where, Liquid Assets = Current Assets – (Stock + Prepaid Expenses )

  OR

  Liquid Assets = Cash + Bank + B/R + Debtors + Short-term investment /Marketable securities

  Cash Ratio-The cash ratio or cash coverage ratio is a liquidity ratio that measures a firm's ability to pay off its current liabilities with only cash and cash equivalents. The cash ratio is much more restrictive than the current ratio or quick ratio because no other current assets can be used to pay off current debt--only cash.

  Cash Ratio = cash + cash equivalents / total liabilities

  FINANCIAL RATIOS OF MICROSOFT COMPANY AND APPLE INC.

  Period Ending	30/6/2016	30/6/2015	30/6/2014	30/6/2013
  MICROSOFT COMPANY
  Current ratio	2.37	2.47	2.50	2.71
  Quick ratio	2.31	2.41	2.45	2.66
  Cash Ratio	1.91	1.94	1.88	2.06
  APPLE INC.
  Current ratio	1.35	1.11	1.08	1.68
  Quick ratio	1.33	1.08	1.05	1.64
  Cash Ratio	0.85	0.52	0.40	0.93

  Interpretation-

  The current ratio indicates the availability of funds to payment of current liabilities in the form of current assets. A higher ratio indicates that there were sufficient assets available with the organization which can be converted in cash, without any reduction in the value. As ideal current ratio is 2:1, where current ratio of the firm is more than 2:1, it indicates the unnecessarily investment in the current assets in the form of debtor and cash balance however liquidity performance of the microsoft company is good over apple inc.

  Quick ratio indicates that the company has sufficient liquid balance for the payment of current liabilities. The liquid ratio of 1:1 is suppose to be standard or ideal but here ratio is more than 1:1 over the period of time, it indicates that the firm maintains the over liquid assets than actual requirement of such assets .This indicates good performance of the Company.Quick ratio is far better in apple inc. than in microsoft company.

  The cash ratio shows how well a company can pay off its current liabilities with only cash and cash equivalents. This ratio shows cash and equivalents as a percentage of current liabilities.

  A ratio of 1 means that the company has the same amount of cash and equivalents as it has current debt. In other words, in order to pay off its current debt, the company would have to use all of its cash and equivalents. A ratio above 1 means that all the current liabilities can be paid with cash and equivalents. A ratio below 1 means that the company needs more than just its cash reserves to pay off its current debt.

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