Sep 13 2012
When people want to invest a business, how can they understand that it has good profit and could be invested? Even though the owner claims that the company has a good growth, it doesn’t mean everything is fine. Financial ratios are the best tools to help us solve questions, such as ROA, ROE, EPS, turnover, and current ratio.
Lamar Swimwear, it is a manufacture company which produces swimsuits, and Bob Adkins, the owner, wants to purchase a 15 percent stock of Lamar. Mr. Lamar claims that his firm has great growth in three years, and he also provides the selected industry ratios to show his firm is good to invest. However, using those financial ratios, it is easy to understand that Lamar is not a stable business.
Although the number looks so nice and increase each year in Lamar Swimwear, using those ratios can help us to know more details and investors can make a right decision.
According to Introduction to Financial Ratios and Financial Statement Analysis (William Bruns, 2004), return on assets (ROA) is an index of how much net income is created by each asset. The higher index shows that company’s assets has a great affection of usage, which means this business has good result to increase their revenue and save their capital. To take a look the Table 1, Lamar’s ROA presents a drop situation which is from 8.01% to 5.70%, but the selected industry displays a good development in 200X to 200Z.
Also, return on equity (ROE) (William Bruns, 2004) shows that the stockholders can get how much money back, which means that ROE is a directory to estimate the profit of the firm. The higher ROE equal the higher earning capable. Table 1 is clearly to appear that Lamar has a reduction of ROE which is from 15.90% to 13.98%; however, the selected industry has an opposed statistics, which is from 14.31% to 16.01%. Those data are given a truth that investing Lamer is not a good choice.
Furthermore, earning per share (EPS) is another important index in an enterprise. Based on William Bruns wrote “Introduction to Financial Ratios and Financial Statement Analysis” (2004), EPS is the earning which is shared to each owner. Therefore, EPS presents the profit of the firm. The higher EPS is considered the higher earning ability, so the company will be treated a good industry. In Lamar, the growth in EPS just only increases 4.08% and 2.94%, and the growth in EPS in 200Y is lower than 200Y. On the contrary, the growth in EPS of the selected industry is higher than Lamar, and its trend still increased in 200Z. That can be known that Lamar is not only a low competition company but also an unstable business.
Moreover, asset turnover can be another norm to check the efficiency when the company processes the all assets in a period of time (William Bruns, 2004). In Table 2, although the asset turnover of Lamar is higher than the selected industry in 200X, which is 1.09x and 1.05x, it goes down in the last year. On the other hand, the asset turnover of the selected industry increases…