Ratio Calculation of Financial Statements

A. Liquidity Ratios

B. Asset Ratios

C. Leverage (debt) ratios

D. Profitability ratios

F. Market ratios

oCalculate liquidity ratios and asset ratios for all 3 companies and submit the calculations along with a written report.

oCalculate leverage ratios for the 3 companies and submit calculations and a written analysis.

oCalculate Profitability ratios and Market ratios for the 3 companies and submit calculation and written report.

Chevron is main company, andConoco Phhilips, Exxon Mobil are competitor companies.

This should be 5~6 pages (written report/analysis)

Example is attached.

VI. Ratio Calculations of Financial Statements A. Liquidity / Asset Ratios Liquidity ratios measure a company's ability to meet short-term debt obligations. Wal- Mart's current ratio has decreased over the past three years. The highest was 0.88 in 2011 and down to 0.83 in 2012. This means that Wal-Mart may have more difficulty meeting its shortterm obligations. In 2012, quick ratio was 0.28, 0.27 in 2011 and 0.23 in 2012. Generally, the higher the quick ratio the greater the company's liquidity and Wal-Mart's quick ratio for the past three years has been significantly lower than 1.0. This means they may have difficulty funding current liabilities. Wal-Mart's quick ratio was much smaller than the current ratio because a large portion of current assets was associated to inventory. Wal-Mart's cash flow liquidity ratio has tracked downward for the last three years, moving from 0.61 in 2010, down to 0.53 in 2011 and 0.49 in 2012. It also makes short-term creditors to think of potential liquidity problems. Wal-Mart's daily inventory held has increased from 39 days in 2010, 42 days in 2011 and 44 days in 2012. This indicates that inventories are spending more times warehoused than it has in the past. Their average collection period has increased slightly. They were at 3 days in 2012, 4 days in 2011 and 2012. Increasing average collection period could indicate that Wal-Mart has become less efficient in its collection policy for the years. Since average collection period increased, their receivables turnover decreased. Wal-Mart's daily payables outstanding were 36 days in 2010, 38 days in 2011 and 39 days in2012. They extended days to delay their payment and conserve cash that could arise from better terms with vendors. Since Wal-Mart's cash conversion or their ability to convert product into cash inflows improved for the three years. It was 6 days in 2010, 7 days in 2011 and 9 days in 2012. Improving cash conversion cycle has a positive impact on firm performance over time and liquidity over time. Wal-Mart's fixed asset turnover ratio remained consistent over the three years. It was 4.10 times in 2010, 4.01 times in 2011 and 4.08 times in 2012. An increasing trend in fixed asset turnover ratio is desirable because it means that the company has less money tied up in fixed asset. However, declining trend means the company is over investing in their property, plant and equipment. It would appear that Wal-Mart has established a balanced approach to manage fixed assets but it would be better if they reduce their property, plant and equipment. Like the fixed asset turnover, they did not show much change in total asset turnover, but slightly decreased. It was 2.40 times in 2010, 2.34 in 2011 and 2.31 in 2012. Decreasing in total asset turnover ratio may indicate a problem with the asset categories composing total assets. Wal-Mart could not fully utilize well their assets over the last three years. The liquidity ratio of Target has been up and down over the past three years. In 2010, the current asset ratio was 1.63, in 2011 it was 1.70, and in 2012 it was 1.15. There was an increase between the years of 2010 and 2011 but a decrease from 2011 to 2012. This calculation shows over the previous three-year span, Target has shown a weaker short-term wealth. The current liabilities over the last three years have also declined, which could be improved on by Target. When it comes to it comes to Target's fixed asset turnover, like Wal-Mart, they have remained consistent. In 2010 the fixed asset turnover was 2.60, in 2011 it was 2.69, and in 2012 it was 2.47. Target's fixed asset turnover increased from 2010 to 2011 and although there was a slight decline from 2011 to 2012, Target remains relatively consistent. Costco's current ratio has decreased slightly since reaching a high of 1.16 in 2010, dropping to 1.14 in 2011, and 1.10 in 2012. This would indicate the company has lost some liquidity, which means their ability to convert assets into cash may be compromised. Costco's quick ratio has also diminished over the last three years, which increases the concerns regarding their ability to fund short-term debt. Last year, their quick ratio was 0.52, down from 0.58 and 0.60 in 2011 and 2012, respectively. The concerns associated to Costco's ability to meet their short-term liabilities looks to be a trend that is plaguing the industry. Even though the above-mentioned ratios indicate potential liquidity issues, Costco has reduced their average collection per to (4) days. This has a direct effect on their cash conversion, which when compared to Target and Wal-Mart, is the lowest at (3) days. Costco's fixed asset turnover seems to have seen had a larger swing over the last three years, as compared to Wal-Mart and Target but as previously mentioned, \"an increasing trend in fixed asset turnover ratio is desirable because it means that the company has less money tied up in fixed asset.\" At 7.65, Costco has the largest fixed asset turnover between the (3) companies being compared. This is up from 6.89 in 2010, which indicates that in the last three years Costco has become increasing independent of fixed assets. Like Wal-Mart and Target, Costco has had a relatively consistent total asset turnover. The highest of which being 3.57 in 2012, which is up from 3.20 in 2010 and 3.22 in 2011. . Based on our research, Costco seems to be an industry leader in efficiency. B. Leverage (debt) Ratios Leverage ratios are important to the financial analyst because it measures the extent of the firm's financing, as it is associated to debt. Wal-Mart's leverage ratios show the trend of Wal-Mart having their best debt ratio in 2012. Wal-Mart is showing the amount of debt and risk increasing from 2010 to 2012; however, this does not mean the company is not profitable. Wal-Mart had a debt ratio of 28.62% in 2012, 28.19% in 2011 and 24.77% in 2010. Because their liabilities increased more than assets, they could have higher debt ratio year by year. Wal-Mart showed small increases in long-term debt to total capitalization from 2011 to 2012. It reported 38.53% in 2012 and 38.09% in 2011. Long-term debt is used for the firm's permanent financing, and as stockholders' equity increased, their long-term debt will also increase. Debt to equity ratio measures the riskiness of the firm's capital structure that is supplied by creditors and investors. Since Wal-Mart's debt to equity increased so much from 2010 to 2011, they had a greater degree of risk. Compared to 2011, there was only a 2% increase in 2012. Each of the three ratios has increased somewhat for Wal-Mart from 2010 to 2012, which means they have slightly riskier capital structure. When the ratios have increased, creditors and investors might worry about Wal-Mart's financial situation. Wal-Mart showed their times interest earned ratio has decreased over the three years. Although it decreased slightly, a lower times interest earned ratio is not beneficial. Wal-Mart reported 10.51 times in 2012, 10.67 in 2011 and 10.69 in 2010. The cash interest coverage ratio measures how many times interest payments can be covered by cash flow from operations before interest and taxes. It was the highest in 2011 with 12.38 times, median in 2012 with 11.36 times and the lowest in 2010. In 2011, the company improved its ability to cover interest payments from operating profits and cash from operations, but did not do well in 2012. The fixed charge coverage has decreased to 2.88 times in 2012 compare to 2011. Wal-Mart showed increased in rent expense, but the firm should improve more rent expense and operating profit to improve its fixed charge coverage. Wal-Mart's cash flow adequacy has decreased over the three years, reported 0.93 times in 2012, 1.13 in 2011 and 1.17 in 2010. The company did not covered annual payments of debt, capital expenditures, and dividends well. To satisfy Wal-Mart's leverage ratios, Wal-Mart should be concerned with covering the principal payments with cash generated by the company rather than by borrowing. Upon completion of the leverage ratios for Target, it was determined that their debt ratio has increased over the last three years. In 2010 it was at 25.44% to 30.64% in 2012. At a glance it appears that Target has a large amount of assets that are financed with debt. Target's long-term debt has remained the same for all three years. There was no percentage change between the years for long-term debt. The debt to equity has dropped over the past few years. In 2010 it was at 116.37% and it dropped all the way to 104.43% by 2012. Finally, the times interest earned for Target has been increased from 2010 to 2012. In 2010 it was 5.94% and in 2012 it is at 6.05%. The leverage ratios show that Target has been stable across the board over the past few years. The consistency of the debt ratio seems to be a good sign; however, it is difficult to fully analyze everything concerning risk. Costco's financing of assets with debt has remained in the 50 % range. Long-term debt to total capitalization has dropped significantly since 2010. This means that they are slowly using less long term financing as their overall financing makeup. Debt to equity for Costco has shown some fluctuation, however, its numbers are low enough where there is no real risk with its capital structure. The steady increase in the times interest earned is definitely a positive because Costco is generating profit as well as cash flow from operations. Cash interest coverage continues to improve from year to year. Costco shows that they are generating enough cash from operations. Cash flow adequacy has remained very consistent over the last three years. Clearly, Costco is able to cover annual payments from its operating cash flow. C. Profitability Ratios Profitability ratios show overall efficiency and performance of how Wal-Mart did over the three years. Gross profit margin, operating profit margin, and net profit margin represent the company's ability to translate sales dollars into profits at different stages of measurement. Wal-Mart slightly decreased their gross profit margin, operating profit margin, and net profit margin in year 2012, which means Wal-Mart was not able to control the growth of operating expenses. Wal-Mart also decreased their cash flow margin. Cash flow margin is important because it shows the relationship between cash generated from operations and sales. Although, the company's cash flow margin decreased, the company had greater margin than net profit margin. It is the result of a positive generation of cash. Return on total assets and return on equity are ratios that measure the overall efficiency of the firm in managing its total investment in assets and ingenerating return to shareholders. Wal-Mart reported 8.12% of ROA that is decreased compare to 2011. In 2012, ROE reported 22.01%, so they had poor return to shareholders compare to other years. Cash return on assets also decreased in year 2012, which represents the firm's cash-generating ability of assets was poor than previous years. The company's profitability ratios were lower than industry average. However, Wal-Mart did not make lot of changes. They made changes of decreasing slightly over the years, so it will be easy to recover with the company's efficiency ratios. Earnings per share are net income for the period divided by the weighted average number of common shares outstanding. The company keeps increased with their earnings per share ratio. Wal-Mart reported 4.54 in 2012, 4.48 in 2011 and 3.71 in 2010. It is good to increase the earnings per share because investors always look for companies with steadily increasing earnings per share. Wal-Mart increased with their price-to-earnings ratio in 2012. Increasing in P/E ratio shows that Wal-Mart developed the market generally. Wal-Mart continuously increased with their dividend payout ratio. Increasing in payout ratio makes investors to think Wal-Mart has a good future. The company should maintain the result of market ratios since Wal-Mart is doing well with market ratios. The profitability discussed on the following report is used to measure the profitable revenue from the assets of Target. This will show how well they are performing overall as a company. The measure of the profit will be during a specific time period. When a company has a higher ratio, it shows how well that company is doing in comparison. Target's gross profit has fallen in 2012 compared to 2011. In 2011, Target's profit was the highest it has been over the past three years. In 2011, the gross profit for Target was at 66%. The net profit margin has been fairly steady over the past few years. It was at its highest in 2010 at 1.19% and decreased to 1.09% in 2012. Targets return on total assets has decreased over the years. Between 2010 and 2011 there was no change. In 2012 it decreased .86% from 2011. The return on equity has remained steady at 19% throughout the years. Costco's gross profit margin hasn't changed much with a slight decrease each year. Through this, they are able to control inventories and product expenses by increasing sale prices and converting sales into profits. Net profit margin has increased since 2010, but stayed pretty consistent. After all revenues, expenses, and taxes are considered, they are still increasing profits. Return on total assets, or return on investments, is increasing. This is good for shareholders, as it shows that the company is managing its total investments in assets and producing these shareholders a positive return. Return on equity has also increased, proving a positive return to shareholders. With a higher return on equity than on investments shows that Costco has an increased use of debt. Earnings per share have gone up which allows investors with something to detail their returns. Dividend payouts have slightly fluctuated; however, they have remained in good standing. This may be due to expansion taking place, although, Costco's overall outlook reads very optimistic