The analysis and statistical treatment of the financial component of any company or stock are based on an examination of the profit-making mechanisms, the recording of expenses, and all additional transactions carried out by the organization. Even a superficial understanding of a company’s financial performance is only possible by considering ratios, the value of which reflects the dynamics of the stock in the market. A company’s performance in the market is monitored using liquidity ratios, asset management ratios, and profitability ratios. They are calculated according to official reports on the company’s income and expenses.
Each category of ratios characterizes a specific financial mechanism, the dynamics of which can be traced back through the analysis of the ratios. It is considered best to use assets to equity and current ratios to assess liquidity, as they show evident changes in income movements (Brigham & Ehrhardt, 2021). Estimating asset turnover and inventory turnover makes it possible to determine the conditions under which a company’s assets develop and the mechanisms by which they are realized. Profitability ratios are a category of financial statistics that answer questions about a company’s revenues and their movements. Six different types are commonly used but return to equity, and profit margin seem to be the most important. Based on the indicators’ dynamics, it is possible to analyze its performance and assess its financial plasticity.
Southwest Airlines and Amazon were chosen to evaluate and analyze the financial characteristics. These ratios were calculated and entered into a summary table (Table 1).
Table 1
Southwest Airlines is a cargo and passenger transport company, so the investment is directly reflected in the quality of service, the depreciation of the airline’s equipment, and the overall perception and quality of service. Profitability figures for 2017-2018 show a decline in the quality of the company’s services. The ROE ratio fell by 30% and was only 25.0178 in 2018. The slide can be attributed to lower direct profits and the retention of own stock to improve service quality (this figure was increased again in 2019). A similar effect can be seen in the profit margin, which is kept within the market average. In 2018, it stood at 11.2224 and, consequently, while the number of sales decreases, the quality of sales remains at an average level.
Similar stable performance of the turnover and sales mechanisms can be seen in the asset valuation of Southwest Airlines. Asset turnover is a volatile characteristic that many structures affect the company’s control, so maintaining a constant figure is one of the criteria for successful market performance. Both of the indicators examined show a little movement and remain consistently high. The company is likely selling far more assets than it has reserved, so this tactic is making a loss. Sustainability of this kind is necessary for regulating internal mechanisms and planning the future financial performance of the organization, but such increases can lead to significant losses.
The airline’s liquidity was at a low level of less than 1 in 2017-2018. The current ratio fell from 0.70 to 0.63; hence the company’s solvency is collapsing. Greater competition provokes a high financial market, so the company can’t use current assets to pay its debts. Despite this, the sales and revenue turnover ratio averaged 2.63 over the two years. The company’s inventory is likely low with sufficient sales, which nevertheless cannot pay off debts.
Amazon is the largest company providing services for buying and selling consumer goods. The financial position of such companies is directly linked to advertising opportunities, direct sales, the quality of services, and the number of interested users. In 2017-2018, there was an increase in the company’s profitability and asset turnover, and liquidity was a dynamic characteristic affected by possible debts. ROE increased by 111% in 2018, reaching a value of 23,1303. The increase in the indicator usually indicates the company’s high productivity and high profitability. The rise in prof margin also confirms it: in 2017, it was only 1.7052; in 2018, there was an increase to 4.3253. This value is still low for a large company, but improved profit distribution mechanisms symbolize the growth.
A company’s asset turnover is an unstable characteristic, influenced by many structures independent of the company, so maintaining a constant figure is one of the criteria for successful performance in the market. Amazon has seen an increase in asset turnover, so the company has likely pursued using revenues efficiently rather than accumulating capital. For example, asset turnover was 1.3546 in 2017 and increased by 5% in 2018. Inventory turnover shows the number of sales and earnings generated by the use of assets. Compared to 2017, the figure rose by 16% in 2018. Consequently, the company shows active sales of an increasing nature with high-profit values.
The company’s liquidity is a dynamic indicator reflecting the company’s profit generation and realization mechanisms. The current ratio shows a slight increase: in 2017-2018, it averaged 1.07. However, this is characteristic of developing companies; it may be due to the redistribution of income and possible repayment of debts or loans for stable companies. It is also evident in the assets to equity ratio. Despite the increase in total assets, the profits generated were allocated to debt repayment.
Reference
Brigham E. F. & Ehrhardt M. C. (2021). Financial management: theory & practice (mindtap course list). Kindle Edition.