Financial Ratios and Company Essay

Submitted By Tygreg75
Words: 2057
Pages: 9

There are a few vital ratio groupings that a potential investor should investigate before buying, selling, or holding. We have broken the ratios down to five groups which give you the best information on a company. The first one is short term liquidity which is defined as the ability of the company to be in business in a year. Long term solvency is the amount of debt the company can have and if it can handle the debt. Asset management is measured on how well the company manages their assets. Profitability is how profitable the company is and also how well they manage their assets. The final ratio is market valuation which is the favorability of the company based on the market. As we look into these groups of ratios we get a better insight inside of the company and we also get a better recommendation as in to buy, sell, or hold. We utilized the financials from to get the information for these ratios. If you were look at Yahoo finance, or msn money for ratio comparison they may be a little different. To be conservative, we felt that using their financials would give an investor the best ground to build from.
Short Term Liquidity – Will the Company be in Business in a Year? When you look at the short term liquidity ratios, the most important are the current ratio and quick ratio. The cash ratio has little to no value so there is no need to concern yourself with it. The current and quick ratio has higher value and tells us more. The current and quick ratio tests if a company has enough resources to pay its short term obligations. IHG has a current ratio of .72 and a quick ratio of .71. IHG does not have a lot of inventory so the current and quick ratio is very close. The ratios went on a big decline from last year with a current ratio of .85 and a quick ratio of .84. Typically current ratios below 1 would be an issue and an investor would question the company’s ability to be in business in a year because they are unable to pay their short term obligations. This is not really a detrimental issue with IHG. The company is low on cash because management has been using their cash to buy back shares and payout high dividends. Last year they made a big emphasis on those procedures and bought back a high amount of shares. Therefore the ratios are a little skewed compared to the industry of 1and .7 and the market of 1.91 and 1.25. Some companies use their good long term prospects to take on debt and cover the rest which IHG has done some of. We think this company will be in business in a year and is not a going concern.
Long Term Solvency – How Much Debt Can a Company Have and Can it Handle That Debt? The TIE, debt to EBITDA, debt to assets, and debt to equity are important grouping of ratios. The TIE lets an investor know how many times a company can cover its interest charges on a pretax basis or measures a company’s ability to meet interest obligations. Debt to EBITDA measures ability to meet principal and interest or debt obligations. Another definition would be a company’s ability to pay off its incurred debt. When we look at debt to assets we are looking for a leverage ratio that lets us know the amount of debt to assets. Leverage is using debt to a company’s advantage to help increase earnings that they would not be able to do on their own money. They are not using their own money to finance assets so they can invest in other ways. A higher debt to assets ratio means higher leverage, but also financial risk. If a company has too much leverage then they may not be able to pay off the debt. We also look at debt to equity this equation tells us if a company is using debt or equity to finance its assets. Debt and equity are different because you have to pay off debt. A higher ratio means higher debt and that can be a problem as I mentioned before. The TIE for IHG is 8.6. We feel that IHG is in a perfect spot and can take on more debt if they need to, but not too much. Compared to the industry of 4.1 and