Ratio Analysis

Ratio analysis entails the investigation of organizations’ varied financial statements to determine and briefly provide a simplified outlook of the organizations’ financial performances. These ratios are not only used in determining the position and performance of a firm but are also used in comparing firms which differ in size and even industries, and comparison of the firm’s performance in comparison to the industry’s averages. Apart from comparison purposes, ratio analysis helps the organization to study the financial performance in its different units to project the performance in the short and long term. The key ratio analysis includes profitability, market value, debt analysis and asset analysis (Andrijasevic, 120). Through this classifications, the business’ performance is evaluated about every field of finance is concerned. This, therefore, provides the essence of performing the ratio analysis despite the size of the firm. Medtronic PLC ratio analysis of the three years; 2016, 2017 and 2018 are as analyzed below;

Short-term Solvency Ratios

Short-term solvency/liquid rations provide an analysis of the organization’s short-term money spending including the current and the quick ratio. They help determine whether the organization can meet its liabilities.

The current ratio is used to quantify an estimation of whether a firm can satisfy its transient (liabilities to be satisfied inside a year) by measuring its liabilities against efficiency. It is a proportion of an association’s present resources for its present liabilities. The method of calculation includes measuring the current assets (CA) against the current liabilities (CL) CA/CL.

Therefore, from Medatronic PLC’s financial data, the current ratio for the three years is;

2018

2017

2016

Current Assets

34,840

32,734

33,240

Current Liabilities

11,235

15,410

8,500

Current Ratio

2.28

1.75

3.29

The quick ratio or Acid ratio is a liquidity ratio that is utilized to decide the firm’s capacity to meet its present liabilities with just the current resources. These are assets that can be converted to money in 90 days if need be. Acid ratio’s formula is:

(Cash + Current receivables)/Current liabilities

Therefore, from Medatronic PLC’s financial data, the quick ratio for the three years is;

2018

2017

2016

(Cash + Cash receivables)

29,953

29,710

28,833

Current Liabilities

5,987

5,591

5,562

Quick ratio

5

5.3

5.18

Debt Management Ratios/ long-term solvency ratios

These are ratios that measure the organization’s utilization of money related use and its capacity to keep away from troubles emerging from funds over the long haul. The primary method of calculation is the debt ratio.

Debt ratio. A solvency ratio which is utilized to gauge an organization’s aggregate liabilities in connection to its aggregate resources. It, by and large, demonstrates the capacity of a firm to pay its obligations utilizing its assets. The debt ratio’s formula is;

Total liabilities/Total assets

Therefore, from Medatronic PLC’s financial data, the quick ratio for the three years is;

2018

2017

2016

Total liabilities

10,084

14,220

7,165

Total assets

22,980

24,873

23,600

Debt ratio

0.44

0.57

0.30

Asset Management Ratios/activity/ turnover ratios

These are ratios used to measure the firm’s success in managing its assets to create revenue for the organization. They, therefore, provide insight into the company’s credit policy and inventory management. They include the asset turnover ratio, the inventory turnover ratio as well as the accounts receivable turnover ratio.

The inventory turnover ratio. This is a proportion of productivity that demonstrates how viably stock is utilized by bringing the difference between the expense of merchandise sold and the normal stock. It indicates how often the stock is sold amid a specific period. The inventory turnover ratios for Medtronic PLC for the three years 2018, 2017 and 2016 include; 2.53, 2.78 and 2.63 respectively.

Asset turnover ratio. This is a productivity proportion that evaluates a company’s capacity to develop deals from its advantages. This is finished by comparing net deals and the normal of the aggregate resources which aids to indicate how compelling a firm is in utilizing its resources to create deals. The asset turnover ratio formula is;

Net Sales/Average Total Assets

Medtronic PLC’s asset turnover ratio is;

2018

2017

2016

Net sales

29,953

29,710

28,833

Average total assets

22,980

24,873

23,600

Asset turnover ratio

1.3

1.19

1.22

Profitability Ratios

These ratios measure the success of the company in generating income. They reflect the asset/ debt management and its impacts on the organization. They include the profit margin ratio and the return on assets ratio.

The profit margin ratio. It is also referred to as the gross profit ratio or return on sales ratio. It is used to determine the amount generated with each dollar of sales. Generally, it shows the sales percentage that is left over after paying off all expenses. The profit margin ratio formula is;

(Net sales – Cost of goods sold)/Net sales

2018

2017

2016

(Net sales – Cost of goods sold)

21,734

20,560

19,823

Net sales

30,633

29,464

28,347

Profit margin ratio

0.69

0.68

0.68

The return on assets ratio is a profitability ratio used to determine the net income produced by the organization’s assets periodically. It, therefore, measures how efficiently a company manages its assets to generate profits. The return on assets ratio formula is;

Net income/Average total assets

2018

2017

2016

Net income

29,953

29,710

28,833

Average total assets

22,980

24,873

23,600

Return on Assets Ratio

1.3

1.19

1.22

Works Cited

Andrijasevic, Maja, and Vesna Pasic. “A blueprint of ratio analysis as information basis of Corporation financial management.” Problems of Management in the 21st Century 9.2 (2014): 117-123

Daniel, Gencia Adrian. ”A Consensus on Commonly used Financial Ratios.” Proceedings of FIKUSZ Symposium for Young Researchers. Óbuda University Keleti Károly Faculty of Economics, 2015.