Interpreting Financial Results Interpreting financial ratios in a corporation is very important and helps us understand where the company comes from and where it is heading regarding financial performance. Ratios mostly provide historical data, and management can use this information to identify the internal strengths and weaknesses of an organization, and estimate future financial potential. Ratios should be compared to historical data and industry standards for them to be useful and meaningful. There are four basic types of financial ratios that are mainly used: Liquidity, Leverage, Profitability and Efficiency. In this paper, Costco Wholesale is the company that will be evaluated and ratios compared with its last three years (2012,2013,2014) …show more content…
The current ratio for each year is: (2012) Costco Wholesale Year - 13.53 / 12.26 = 1.10 (2013) Costco Wholesale Year - 15.84 / 13.26 = 1.19 (2014) Costco Wholesale Year - 17.59 / 14.41 = 1.22 Quick Ratio = (Current Assets-Inventory)/(current liabilities) If a ratio is less than one it means the company has more liabilities than assets, and when the ratio is higher it means that the company is more able to pay off its obligations. Leverage or solvency ratios indicate financial stability because they measure a company’s debt relative to its assets and equity. A leverage ratio is one of the measurements that indicate how much capital comes in form of debt to meet financial obligations. In this case if the ratio is higher there is a greater potential return and a higher risk for bankruptcy. The best well-known formula to obtain this ratio is Debt-to-Equity Ratio = (total debt (total liabilities))/(total equity) (2014) Costco Wholesale Total debt = 20.51B (2014) Costco Wholesale Total Equity = 12.52B Debt-to-Equity Ratio = (20.51)/(12.52)=1.64 …show more content…
Efficiency ratios show the ability of a company to use its assets to produce sales. The higher the ratio the more favorable for the organization, some of the most common ratios to demonstrate efficiency are: Inventory turnover ratio, Total Assets turnover Ratio. These ratios have more meaning when compared to similar companies in the industry. Inventory Turnover = Cost of good sold / Inventory Total Assets Turnover = Net Sales / Total Assets (2014) Costco Wholesale COGS = 98.46 (2014) Costco Wholesale Inventory = 8.46 Inventory Turnover = (98.46)/(8.46)=11.64 (2014) Costco Wholesale Net Sales = 112.64 (2014) Costco Wholesale Total Assets = 33.02 Total Assets Turnover =