Financial Ratio Analysis Essay

The following report is a brief comparative analysis of two of Australia’s largest deposit-taking financial institutions (FI), Australia and New Zealand Banking Group Ltd. (ANZ) and Westpac Banking Corporation (Westpac). This report seeks to identify which of the FIs has a greater aggregate return per dollar of equity and thus establish the highest performer, or most profitable, of the two. The Return on Equity Model (ROE) (Koch & MacDonald,

The Return on Equity ratio is a measure of the efficiency with which a company employs owners’ capital. It

The higher the return, the more profitable the bank is, in the sense that it utilizes assets to make profits more efficiently. Return on assets can be calculated by dividing net profit after taxes by total assets. Return on equity, on the other hand, measures profitability by looking at how a bank generates profit with the equities invested by the shareholders. It can be derived by taking the ratio of net profit after taxes and equity capital. The relationship between ROA and ROE is that ROE is equal to ROA times the equity multiplier (EM). The equity multiplier is the value of assets divided by equity capital, and it expresses how much assets there are for every dollar of equity capital. If ROA and the amount of assets are held constant, the lower equity capital is, the higher the return for the owners of the bank. For example, if a bank doubles the amount of its capital and ROA stays constant, ROE will fall to half of its original value. This relationship gives bank managers the incentive to hold less bank capital relative to assets, and to have a larger equity multiplier. When the bank is not making a considerable profit, ROE can still increase if equity capital is reduced. This is not the desired outcome of the regulators, because in most cases, the regulatory authorities ask banks to satisfy certain capital requirements. When banks have the incentive to cut off capital, they have a smaller bank capital to assets ratio than is required by the regulators. This

Another important ratio to look at is the Return on Equity (ROE), which measures how profitable a company is by showing how much profit a company has earned with money its shareholders have invested.

The ROI for the Bix Box Stores training program for one year is 225% or 2:25. The company made a net profit of $2.25 for every dollar spent on the training program. I calculated the ROI by subtracting the training costs from the benefits, dividing by the training costs and multiplying by 100. $78,000- $24,000 equals $54,000. $54,000 divided by $24,000 equals 2.25 times 100 equals 225% (Noe, 2016). In order to compute the ROI, I calculated the costs and benefits to use in the ratio.

Return on assets (ROA) and return on equity (ROE) are also good indicators of a company’s performance and profitability. Here we look at how well a company utilizes its assets and how it manages shareholders investments. A ROE percentage that is higher than 15% generally are considered sound investments. However overall investors must look for “conservative accounting policies, substantive sales growth, consistent and/or improving profit margins,

Return on Equity (ROE) evaluates an organization 's profit generating efficiency in relation to every dollar of shareholders ' equity. Also, desirable ROEs range between 15% and 20% (Guru Focus, 2014). USB’s ratios for the last three years show a .02% increase due to net income and shareholders’ equity showing continued growth across all three years. Also, ROE is positively correlated with return on assets (ROA) which also shows the same pattern. When comparing USB to BAC, USB has consistently maintained an ROE difference of 8% or higher in 2013 and 2012. This simply means USB shareholders have received a higher return on their equity investment.

Ideally it should be between 1 and 2. A figure less than 1 indicates that the company did not have enough cash, for example in 2009 with a ratio of 0.82. according to Ted Baker’s web site (http://www.tedbakerplc.com) They had a major business expansion, they spent £11.8 million in 2009 to open up thirty two (32) new stores compared to£1.5 million in 2008 when they opened twenty three (23) , such expansion does not come cheap. There was unpaid royalty income by Hartmax Corporation which was one of the licensed outlets in America which filled for bankruptcy on 23rd January 2009 before the group income statement came out at the end of January. (Ted Baker Report 2009-2010 page 8). On the whole the ratios have been consistent in the last five years. After the 2009 down turn in the figures, management took action by controlling costs and commitments.

To evaluate the overall health of a company most financial analysts commonly use profitability ratios. Profitability

The profitable ratios are divided into two types, returns and margins and they show the overall

Furthermore, it is important to calculate some relevant general ratios. Therefore, the Return on Assets (ROA) and the Return on Equity (ROE) will be calculated. The ROA is a key indicator of the profitability, while the ROE is a key indicator that compares the profit of YUM Brand Corporation to the shareholders investment. The ROA in 2008 is 9.5% and increases in 2009 to 10.29%, while it goes back in 2010 to 9.74%. The above written percentages from 2008 to 2010 compares the bottom line profits to the total investment and can be used to measure the performance of corporations operations.

An entity’s ability to generate profit and return on investment is one of the prime indicators of its financial health (Birt et al., 2010). Profitability ratios inform users as to the profit returns associated with their equity investment. In the case of David Jones, the Return on Equity (ROE) is higher in 2011 than 2012 as the company is experiencing a higher profitability on sales, this indicates that the owners and the shareholders are able to gain returns faster in 2011. Referring to appendix 1, in 2011 the Return on Equity (ROE) of the company was reported at 22% which mean that from every $1 invested there is a

Financial ratios are designed to extract important information that might not be obvious simply from examining a firm’s financial statements. Financial statement analysis involves comparing a firm’s performance with that of other firms in the same industry and evaluating trend in the firm’s financial position over time.

With the help of financial statements that arise by the firm, analytical methods can be used to get information about the course of the business and the economic state. By calculating a small number of ratios it is possible to develop a clear picture of the position and performance of a firm (P.Atrill and E.Mclaney 2013). Financial ratios have two main users, management and inventors. Management uses financial ratios to analyse, control and determine the

For my hypothetical model of ROI, I used the information from the Apple retail store that opened in SoHo, New York, in 2004. I am also using Apple’s 2004 and 2005 retail financials.