ACCT 601 Week 6 Written Assignment: Macy’s Inc Financial Statement Analysis (GRADED A)

Running Head: Macy’s Inc Financial Statement Analysis 1 ACCT601 – Accounting Capstone Week 6 Written Assignment Financial ratios Profit margin= Net Income/Sales revenue 2015: 1,070/27,079=3.95% 2014: 1,526/28,105=0.0543 or 5.43% Return on Shareholders’ equity=Net Income/ Shareholders equity 2015: 1,070/4,250=0.2518 or25.18% 2014: 1,526/5,378=0.2837 or 28.37% Current ratio=Current assets/Current liabilities 2015; 7,652/ 5,728=1.34 2014: 8,580/5,075=1.69 Interest coverage ratio= EBIT/Interest expense 2015:2,039/363=5.62 2014: 2,800/395=7.09 Question 1 For potential vendors the most important ratio is the current ratio. Current ratio measures the liquidity of a business by evaluating the ability of a company to fulfill short-term obligations when they fall due. Most suppliers conduct their business on a credit basis to provide ample time for business to pay for their merchandise. They set out the length of the credit period and expect the clients to pay back within the set time. Therefore, it would be important for Macy’s Inc to have adequate liquidity to make the payments whenever they fall due. Another ratio of interest would be the quick ratio which is also a liquidity ratio. The quick ratio can be considered a more efficient ratio than the current ratio. The main reason for this is that it only considers the most liquid assets that are easily convertible to money such as accounts receivables and short-term investments. Inventory is excluded in the calculation of the ratio since it may take time for a company to sell and realize the money. The ratio informs potential vendors if a company will be able tore pay their debt and on time based on the most liquid assets. Question 2 Investors refer to people who willingly input money into a business with the expectations of a return in future. Normally, investors have an interest in all the ratios as they indicate the financial health of a firm. One of the most important ratios to potential investors is return on shareholders’ equity. The ratio measures the percentage return that investors get for every dollar of their investment in a company. For example, from the calculation above, Macy’s Inc shareholders got a 25.18% for every dollar invested in year 2015. A high ROE is an indicator of high returns to the shareholders. Profit margin ratio is of importance to investors. The ratio measures the management’s efficiency in managing costs and product pricing. If management is efficiently handling the expenses they will reduce leading to a higher net income that translates to a high profit margin. The pricing method used also determines the margin. For example, high prices may deter consumers while low prices result to a loss for the company. Studying the ratio over time helps investors to decide whether or not to place their money in the company. Interest coverage ratio influences the decision of investors. Investors are risk averse and want to be sure that they will get back value for their money from a company. The ratio analyses the business’s ability to pay interest expense i.e. how many times the company’s earnings can cover interest costs. The higher the ratio, the better the company’s liquidity. Use of financial leverage has been known to lead to bankruptcy of companies hence the need to ensure that a business can pay back financing costs before making an investment. There are several other ratios that should be considered in an investment context including P/E ratio, debt to equity ratio, dividend yield and asset turnover ratio. P/E ratio indicates how much money an investor is willing to pay to acquire one unit of a company based on the earnings. The ratio is often indicates whether a company is overvalued or undervalued. A high P/E ratio is a sigh that investors expect the company to provide higher returns in the future. Thus, this ratio enables potential investors to understand market sentiments towards a company. Debt to equity ratio is a leverage ratio. The ratio establishes the amount of company’s assets financed by debt and equity. Companies make use of debt to finance projects because it is a cheaper than equity. However, too much debt is harmful and can lead to insolvency. A ratio that is higher than 1 is a sign of danger to the investors. Investors carefully evaluate the ratio, what it means to the company and how it will affect the business’s future. Shareholders get returns in form of dividends payments from a company. Dividend yield expresses the amount of dividend per share in terms of the share price. A high dividend yield reckons that a company is performing well and is able to adequately compensate shareholders. A low yield on the other hand can signal financial problems in a company. Question 3 The company is facing tremendous challenges in maintaining its performance. From the four ratios above, the company’s performance in 2015 was lower than its performance in 2014. This can be seen from the declining profit margin from 5.43 % to 3.95%, lower current ratio of 1.34 to 1.69, fall of ROE from 28.37% to 25.18% and interest coverage ratio of 5.62%. However several questions should be considered in making this analysis. What were the economic conditions in 2015 in comparison to 2014? How did the competitors perform in the same period? Directors and management’s explanations for the company’s performance. The answers to these questions give more insight into the company’s performance. Works Cited (2016). P. Retrieved 7 April 2016, from rate-