|Item||Amount $m 2011||Amount $m 2010||Amount $m 2009||Industry averages|
|Return on Equity||12,942/45,911 |
|Return on Assets||12,942/71,119 |
|Net profit margin||12,942/53,999 |
|Gross profit margin||33,757/53,999 |
|Current ratio||25,872/12,028 |
|Quick ratio||(25,872-4,096)/12,028 |
|Earnings per share||$2.46||$2.06||$0.79|
|Price over earnings||25.66/2.46 |
|Current liability coverage ratio||(20,963-4,127)/ 12,028 |
|(16,692-3,503)/ 9,327 |
|(11,170-3,108)/ 7,591 |
|Long term debt coverage ratio||(20,963-4,127)/ 7,084 = 2.38||(16,692-3,503)/ 2,077 = 6.35||(11,170-3,108)/ 2,049 = 3.93||2.01|
|Asset efficiency ratio||20,963/71,119 |
Report to management
According to the ratio analysis carried out above, it is clearly evident that in terms of profitability, Intel Corporation is performing above the industry standards. This is also supported by the asset efficiency ratio which is also above the industry average. All the profitability ratios show that the company’s performance is well above the industry averages meaning that it is a worthy investment for investors. The liability coverage ratios also show that the company’s assets are able to cover the liabilities several times over. This is an indication that the company is solvent and is therefore able to continue with business operations in the foreseeable future as the working capital can support that. The company shares are also performing well in the market as indicated by the price over earnings ratio. The company management can therefore engage in more investing activities as the ratios show a growth trend for the company. It is also clear that the company is efficient in terms of assets usage. Financial institutions should also be comfortable lending to the company even in the long-term as solvency ratios indicate that the company’s assets are able to cover their obligations as and when they fall due.
The fact that most of the ratios calculated in the table above are better than the industry averages show the attractiveness of Intel Corporation to investors. The foreseeable future for the company in terms of performance and return on shareholders’ investments is seen to be on a growth trend. The company management is however advised to put more focus on improving the level of debt as compared to the equity invested. This will increase the returns to shareholders and therefore send a positive signal to the market which will result in an increase in the price of the company’s shares.
AMC Entertainment Inc., Case 5.12
Profitability: The gross profit for margin for the company is attractive but the net profit margin on the other hand is very low. This means that the company is not efficient in terms of minimizing their expenses. The return on assets and the return on equity ratios are also on the lower side meaning that the company is not attractive to investors as their investments will not bring good returns.
Long term solvency: The ratios presented show that the company has accumulated a lot of debt and the ability to pay these debts is low. This therefore means that the company is highly leveraged and is exposed to the risk of inability to repay their long-term debts. The cash flow adequacy ratio also shows that the company is at the risk of lack of cash to fund its operations both in the short run and in the long run.
Capital structure: The ratios indicate that the capital structure of the company is highly leveraged meaning that it constitutes more of long-term debt than common equity. This means that a large percentage of the company’s operations are funded through debt than from shareholders money. This is a very risky situation because the company runs the risk of losing credit worthiness and therefore may lack funds to invest. Generally, debt is considered to be a more expensive source of capital than shareholders equity and therefore the company will require a higher rate of return in order to make profits. The company also runs the risk of insolvency in the case that the long term debt obligations mature at the same time. Therefore the capital structure of the company is very risky and needs to be restructured.
Comparing Financial and Managerial Accounting
Financial accounting: Is used primarily by external parties, is relied on for making decisions, is historical in nature, reports can be obtained through the company Web site or requested from the company CFO for publicly traded companies, is reported in aggregate for the company as a whole and is always available on the Internet to any interested party.
Management accounting: Is future oriented, is relied on for making decisions, reports may be reported daily or even in real time, is used mostly by managers within the company and must be accurate to help decision makers (Fraser & Ormiston, 2013).
Fraser, L.M., & Ormiston, A. (2013). Understanding Financial Statements (10th Ed.). Upper Saddle River, New Jersey: Pearson.