Horizontal Analysis
The analysis of the financial reports of an organization is vital for existing stakeholders of any given firm. Horizontal analysis is one of the forms of analyzing the reports of the firm and it emphasizes the changes in the trends of the financial reports of the firm in question over time. The changes realized could be used to identify the issues affecting the firm that it performs the way it does and possible strategies that could be used by the firm to improve the poor performance.
EMC Corporation Consolidated Balance sheet as at 31st Dec.
The horizontal analysis utilizes a base year with the dollar amount for subsequent years being expressed as a percentage of the amount of the base years in dollars. Given the above balance sheet of the firm, various calculation outcomes could be realized. From the current assets, cash and cash equivalent in 2011 was $ 4,531,060 and in 2010, it was $ 4,119,138.
=$ 411,898
411898/4119139*100=9.99%
Short-term investment; year 2011=$1,786,987
= 2010 = $125,6175 = $530812
= 530,812*100/1,786,987=42.25%
From this analysis, it can be noted that the amount of dollars and percentage values for each financial statement item rises in each year. However, the trends for each item differ.
Vertical Analysis
Also known as the common size analysis, vertical analysis converts the financial outcomes of different components of the firm into a percentage of a given component of the financials that is very vital for the firm. For instance, the total revenue of an organization could be taken as the vital component and all other components on the balance sheet being represented as a percentage of the total revenue earned by the firm.
Similarly, Total assets could be taken as the base on which to measure other assets of the organization. Total assets could be easily determined through the summation of total liabilities plus equity shares. Therefore, each equity or liability item is calculated as the percentage of this total liability or equity that is 100%. Using the balance sheet of EMC corporation vertical analysis can be done follows;
Vertical analysis of EMC Corporation Balance sheet as of 31st Dec 2010/2011
Calculated examples; cash and cash equivalent: 45310316Ă·34268179=39.2%
A/c payable: 1101659Ă·14221732=7.7%
From the above vertical analysis there is much more consistency in the asset and liability percentages of the company which, suggest that the company management is in better control. Though this consistency may be due to different times covered. A more detailed analysis would be the inclusion of quarterly months.
Profitability Ratios
In an analysis of the Company’s profitability, the profitability ratios are used that measures the income performance of the company. Profitability ratios are divided into returns and margins. In order to indicate the changes that an organization has undergone in its revenues from sales, the management of a given firm could use margins.
On the contrary, returns indicate ratios that are used by different firms to indicate the efficiency that an organization realizes in its capability to generate income. The main objective of business is to make profit therefore the profitability ratios assist in evaluating business methods of achieving goals. IN order to evaluate the profitability of Emc Corporation, these ratios are necessary:
As one of the major profitability ratios, the gross profit margin expresses the dollar amount of goods sold as a percentage, thereby providing the management with possible strategies that could be used to overcome the problem. It primarily centers on how firms manage inventory expenditure and product manufacturing and in view of that share the cost with its clientele. The gross profit margin is calculated as follows:
(Gross profit Ă·Net sales)*100
From the EMC corporation financial statements;
12168942Ă·10030981)*100=60.82%
(10030981Ă·17015126)*100=58.95%
The gross profit margin rises by 1.87 from 2010 to 2011 indicating high inventory management that translates to high profits margins. In the year 2010 the gross profit ratio was 58.95% and 60.82% in the year 2011.This shows that EMC Corporation is managing its inventory very effectively as well as manufacturing products which are increasing the company’s gross profits.
Return on Assets ratio shows the earning after tax of assets and indicates how the company is profitable. Return on assets ratio in the main indicator of the profitable ability of the company. As firms make the net profit that is usually taxed, the difference between this calculated net profit and company’s assets is given in terms of the returns on assets margin. If the percentage rate is high, it indicates that the company is managed well and has health returns on assets. EMC Corporation return assets increases slightly by 1.02 from 2010 to 2011 indicating that the company is profitable and therefore investors can make sound investment with the company (United States Securities And Exchange Commission, 2011).
Concerning the investments that the firm makes, the returns are measured by the return on equity as a ratio. Potential investors evaluate these ratios before making any investment to a company. If the company’s return on equity is high, investors will invest with the company. There is a slight increase of 2.07% off return on equity on EMC Corporation, which indicates that investors can invest with company. It is calculated as follows:
(PATĂ·Av.common shareholders Ă·stock holders)*100
Gross profit ratio = (Gross profit Ă· net sales)*100
Net profit ratio = (Profit after tax Ă· sales)*100
12168942Ă·10030981)*100=60.82%
(10030981Ă·17015126)*100=58.95%
The gross profit ratio increased by 1.87% from 2010 to 2011
Year 2011; Net profit ratio= (2461337Ă·20007588)*100=12.30%
Year 2010; Net profit ratio= (1899995Ă·17051126)*100=11.14%
Return on equity = (Profit after taxĂ·Avg. common shareholders)*100
2011;
(2461337Ă·18959033)*100=12.98%
Year 2010; (1899995Ă·17404040)*100=10.91% the company return on equity improved from 2010 to 2011.
Return on assets= (PATĂ·Av.Total assets)*100
2011; (2461337Ă·34268179)*100=7.18%
2010; (1899995Ă·30833284)*100=6.16%
This is high percentage above 5.0% therefore indicates that EMC Corporation has an effective management and its returns are high.
Assets turnover= (Net salesĂ·Av.total assets)
Solvency Ratios
They evaluate the financial ability of a company and the ability of an organization to satisfy its long-term and short-term obligations. An organization could use six different ratios in establishing its solvency and necessary action steps required for its improvement.
A ratio measuring EMC’s current liabilities to net worth ratio indicates the amount of due creditors in EMC during stipulated financial period such as a year. If the company happens to have a large amount of liabilities, then the net worth realized is too small and vice versa, hence reduced security for creditors. If this risk exceeds 80% the company could be at a high great risk. Its calculation could by the division of current liabilities by the company’s net worth as indicated in eh financial statements.
The current ratio is commonly used as a measure of short-term solvency such as the urgent ability of an organization to pay its current debts as they come. Potential creditors to measure the company liquidity Kaplan & Norton, 2002 commonly use this ratio). Current ratio is calculated using the following formulae = Current Assets Ă· Current liabilities
A quick ratio that is less than 1.0 is an implication that the corporation relies on inventory and supplementary current resources for temporary liability to be liquidated. It is calculated using the following formula: =Cash+ accounts receivableĂ· Current liabilities
The ratio establishment entails division of the current liabilities realized by EMC by the its existing inventory /stock.
The high the ratio the less are company creditors secured. Its calculation entails the division of the total liabilities realized by the EMC Corporation by the company’s net worth as indicated in this subsequent sentence. = Total liabilities ÷ Net worth
“If this percentage is above 75% the more vulnerable is the organization to risk climate and unexpected hazards” (Mowen, 2000, p.65). It is calculated as follows: = Fixed assets÷ net worth
Calculation of the company’s solvency
Debt to Equity ratio= (loan fundsĂ·Total company shareholders)
2011: (3424299Ă·18959033) =0.18
2010: (3450000Ă·17404040) = 0.20
Debt to equity ratio is used for comparison between the amounts of debt that a company has to the amount that owners have invested with the company. It compares the amount of owners’ claims to the firm assets to the creditors’ amount. The analysis shows that EMC Corporation was highly leveraged in the year 2010 but it managed to change this ratio in the following year.
Interest coverage ratio= (Profit before interest and taxĂ· Interest expense)
2011: (3419736Ă·170466) =20.61
2010: (2786328Ă·178345) =15.62
Interest coverage ratio increases from 15.62 to 20.61 indicating that EMC Corporation relied heavily on borrowed funds. The Suggestion of this ratio is that whether the company manages to earn enough income to cover its expenses it depends a lot of borrowed capital.
Ratios Measuring Liquidity
Liquidity ratios help a company in determination of its ability to pay off its short-term debts obligation. If a company has a higher value of liquidity ratio the margin of safety are high for the company to cover short-term debts.
Current ratio= (current assetsĂ· current liabilities)
2011: (11582683Ă· 10376210) =1.12
2010: (9783322Ă·9378014) =1.04
This is used to evaluate the ability of the company to pay current liability with current assets. The steady increase shows that the company has an outstanding liquidity.
Quick ratio=Total quick assetsĂ· current liabilities
2011: 9255522Ă·10376210=0.89
2010: 7944836Ă·9378014= 0.84
The company to measure its ability to meet short-term objectives uses this ratio. Because of inventory, the quick ratio is better than the current ratio and therefore the company is performing better.
Cash ratio= Total cash assetsĂ· current liabilities
2011: 6318023Ă·10376210=0.61
2010: 5375313Ă·9378014=0.57
Cash ratio shows the number of times every year debtors turn into cash. It shows the ability of the company to collect the credit policy. An increased cash ratio indicates the high ability of the firm to collect debtor’s cash. The increasing trend in the two years shows that the company has managed to improve on the credit policy
Financial Health of the Company
The Emc Corporation did an amendment and reinstatement through stock plan that granted a stock option.Thecompany restricted stocks and made available the stock prices. The exercise prices for the stock option were not less than 100%. Of the fair market value of the company’s common stock on the due date, it was granted. The company’s grants restricted stock awards were vested only by the passage of time (Mowen, 2000).
Some companies were not subjected to the vesting stock awards. Emc corporation directors and shareholders plan of 2003 allowed a grant of up to 360 million shares of common stock. As at December 2011, the weighted average of the company that had remained had an intrinsic value of $649.5 million for 78.8 million exercisable shares that were available on offer. Both the directors and the management of the company have long-term plan of improving on their operations through the retained capital investment.
The analysis of the performance of an organization financially is very vital for every stakeholder including investors, suppliers and consumers. Stakeholders in the organization could use the provided financial outcome to establish their role in the organization. For instance, investors could determine their levels of investment in the firm while suppliers could also determine whether to provide the firm with goods on credit basing on the provided financial information.
References
Kaplan, S. & Norton, D. (2002). The balanced scorecard. New York, NY: Harvard Business School Press.
Mowen, P. (2000). Financial accounting as a tool for decision-making process. Chicago: Routledge.