EVALUATING FINANCIAL STATEMENTS
Evaluating Financial Statements
(Team A)
Andrew Harms, Charita Hearn, Olivia Nieto,
Adrian Torres, Donna Wetjen, and Christopher Woods
FIN/419
10/3/2016
Philip Celestine
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EVALUATING FINANCIAL STATEMENTS
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Evaluating Financial Statements
The assignment is choosing automotive industry where an analysis of Ford Company and Tesla
Company are done for their years ending 2015 as shown below:
Price to Earnings
Ford
Trailing P/E= 18.99
Tesla
Trailing P/E= -23.75
Industry average= 7.38
The companies’ recent P/E ratios are obtained and it is evident that Ford is doing well since its
ratio is above the industry average. Based on this ratio, it is best to advise others to invest in Ford
Company since there is a return over the stock’s price in the market.
Gross Margin
Formula
Gross margin= gross profits/ revenues
Ford
= 5,793,193/30,013,891
= 0.19302
= 19.3%
Tesla
EVALUATING FINANCIAL STATEMENTS
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= 923,503,000/4,046,025,000
= 0.22825
= 22.825%
Industry average= 21.77%
When comparing the ratio to the industry average, Tesla Company is performing slightly above
the industry average whereas Ford is approximately 2% below the market ratio. This means that
as much as the companies have posted positive gross profit margins, only Tesla is able to
perform above the required industry average. This ratio suggests that during the financial year
2015, it would have been advisable to invest in Tesla Company since it had above industry gross
margin thus efficient in the sector.
Profit Margin
Formula
Profit margin = net income / revenues
Ford
= -1,433,981/30,013,891
= -0.04778
= -4.778%
Tesla
= -888,663,000/4,046,025,000
= -0.21964
= -21.964%
EVALUATING FINANCIAL STATEMENTS
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Industry average= 3.79%
Both companies have reported a negative income a reason why they have negative ratios. The
industry average of this ratio is also low of 3.79% an indication that the general automobile
sector was not doing well in that particular financial year. These ratios are not good news to the
potential investor and current investor in the company. This is because there are no profits for
distribution to the members from that year’s operations, it is understood that the industry also
reported lower ratio but that is an indication that some companies in that Automobile sector
made net profits that are positive for distribution to its members.
Current Ratio
Formula
Current ratio = current assets/ current liabilities
Ford
= 12,658,729/5,329,909
= 2.375
Tesla
= 2,791,568,000/2,816,274,000
= 0.99123
Industry average= 0.32
The current ratio tries to measure liquidity level of the business so that a company is able
to fulfil its financial obligations when they fall due. A ratio of one or slightly below one is
desirable. However, in that year the industry average went as low as 0.32. This means that the
EVALUATING FINANCIAL STATEMENTS
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companies were generally undergoing liquidity problems but the two companies seem to do well.
However, the ratio for Ford is not desirable because it is far above 1 and this may pose
opportunity cost problems to the company where the resources could have been otherwise used
for other economic activities that would give the company more returns.
Tesla company shows that it makes maximum use of its available current assets and thus
economical unlike Ford which has excess liquidity. Depending on the type of investor. Such as
risk averse, risk neutral and risk taker, one may either go with the one of excess liquidity (risk
averse) and another go with low liquidity (risk averse). However, for the risk neutral he or she
may go for any company’s stock in the market since they are indifferent to risk posed by
liquidity problems.
However, based on the ratios, advise an investor to take shares in Tesla Company.
Debt to Equity
Formula
Debt to equity = long term debt/ total shareholders’ equity
Ford
= 0/7,333,313
=0
Tesla
= 2,040,375,000/1,088,944,000
= 1.87372
Industry average= 0.34
EVALUATING FINANCIAL STATEMENTS
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Ford Company has a ratio of zero meaning that it is not taking advantage of debt to
leverage itself. On the other hand, unlike Ford which is equity based, Tesla is not as it make use
of both debt and equity to finance its activities. However, the company is leveraged too much
thus posing itself to dangers of losing control and in the event of bankruptcy or possible
liquidation then it remains with nothing for the stockholders. This trend is bad for the company
since the industry average is 0.34, far much from Tesla’s 1.87372.
Based on this ratio, I would invest in Tesla Company because it has taken advantage of
leverage by making use of debt in its capital structure. This is good as it has diversified its
sources of capital and also takes advantage of tax shield on its profits since interest expense is
tax allowable unlike dividends that the company is taxed first then distribute it to its members to
be taxed again thus being double taxed.
Return on Assets
Formula
Return on assets = net income/ total assets
Ford
= -1,433,981/12,778,424
= -0.11222
= -11.222%
Tesla
= -888,663,000/8,092,460,000
= -0.109814
= -10.9814%
EVALUATING FINANCIAL STATEMENTS
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Industry average= 3.57%
Both companies are not doing well. The ratios are negative implying that they both made
losses in that financial year. However, the average return on asset in the industry was a record
positive of 3.57% meaning that as much as Tesla and Ford were making losses, other companies
in the same Automobile sector were making profits.
The ratios are an indication that both companies are doing badly in the market place. This
is despite an industry average of positive 3.57%, meaning that other companies are able to have
positive returns on the assets. This makes me not choose any company during that year since
they would have resulted into the loss of my stocks’ value yet other companies in the same
industry are posting positive returns.
Return on Equity
Formula
Return on equity = net income/ total shareholders’ equity
Ford
= -1,433,981/7,333,313
= -0.19554
= -19.554%
Tesla
= -888,663,000/1,088,944,000
= -0.81608
= -81.608%
Industry average= 10.17%
Both companies performed poorly and posted a negative net income. This has made their
returns on equity to be negative as well. Tesla is performing badly compared to Ford since it is
eating too much of its equity. For every 100 dollar invested in Tesla, about 81 dollars are lost due
to losses made. On the other hand, for every 100 dollars invested in Ford Company, about 20
EVALUATING FINANCIAL STATEMENTS
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dollars is lost. This is despite the industry average where investment of 100 dollars in form of
equity gives a return of about 10 dollars. The companies need to streamline its operations so that
it makes returns to its equity holder. I cannot buy any stocks in the two companies if I were to
base it on return on equity.
Decision to buy or sale the shares of the two companies
Generally, the two companies are not performing well especially from the last year’s
2015 financials. Both companies posted losses in the year meaning that dividends were unlikely
paid in that year. However, looking at the prospects of the company and their 2016
performances, Tesla is a perfect choice of the two companies to consider especially if someone
does not intend to buy and sell them any time soon.
EVALUATING FINANCIAL STATEMENTS
References
Automobile company. (2016, September 30). Retrieved from
Tesla Website: https://www.tesla.com/
Ford company. (2016, September 30). Retrieved from
Ford Web Site: http://www.ford.com/
Yahoo Company. (2016, September 30). Retrieved from
Finance Web Site: https://finance.yahoo.com
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