Profitability: is the earning power ability of Compass Group PLC, Toronto Dominion Bank, Harris Corp, Morgan Stanley, and Boeing Co to generate profits and increase net assets in the future. The companies’ Net income, especially the persistent components of net income was considered as an indication of earning powers.
Solvency: refers to the ability of Compass Group PLC, Toronto Dominion Bank, Harris Corp, Morgan Stanley, and Boeing Co to meet debts as they come due.
Financial performance: refers to the economic success of Compass Group PLC, Toronto Dominion Bank, Harris Corp, Morgan Stanley, and Boeing Co over five consecutive years.
Financial flexibility: refers to Compass Group PLC, Toronto Dominion Bank, Harris Corp, Morgan Stanley, and Boeing Co capacity to raise cash through methods other than operations, which could include short- and long term borrowings, issuing equity, or setting assets.
Financial condition: refers to the economic strength of Compass Group PLC, Toronto Dominion Bank, Harris Corp, Morgan Stanley, and Boeing Co as of 20004 to 2008 periods.
Definition of Terms
Financial statements: are a summary of the financial condition and performance of Compass Group PLC, Toronto Dominion Bank, Harris Corp, Morgan Stanley, and Boeing Co, prepared by its management and in some cases reviewed by independent auditors. Their financial statements consist of the income statement, balance sheet, statement of cash flows, statement of stockholders equity, and related footnotes.
Financial ratio analysis: is one of several techniques used to analyze financial statements of Compass Group PLC, Toronto Dominion Bank, Harris Corp, Morgan Stanley, and Boeing Co in an effort to assess earning power, solvency, and earnings persistence. Financial ratio analysis of the content of the banks’ financial statements involves computing and analyzing ratios that use financial statement numbers. These ratios are divided into three categories: Profitability, solvency, and liquidity ratios. The DuPont Model was used as the take off point in showing the differences in return on equity and return on assets across time across companies.
Apparently, an asset puts money into the company coffers, while liabilities draw off and drain the latter. Therefore, in cases of attempts to shift liabilities to assets, just like what the account managers did to World Com, indeed reflecting an increase revenue and subsequent decrease in expenses, as well as increase in assets, but, the cash was streaming out of company coffers. This is what they usually call capitalization on liabilities or outflow (Pratt, 2003; Kiyosaki and Lechter, 2002).
The ability to read, understand, and interpret the financial statements is a key element of financial statement analysis, which results are in turn used as the basis for taking steps towards financial decision and company valuations (Pratt, 2003; Comiskey & Mulford, 2002).
However, the richer the person is or the bigger the company is, the more sophisticated is the financial statement. Below is an example of a simple personal financial statement.
“CASHFLOW 101” (Kiyosaki and Lechter, 2002)
Profession __________
Goal: To get out of the rat race and onto the fast tract of building up passive income to be greater than total expenses
Income Statement
Income | |
Description | Cash Flow |
Salary: | |
Interest: | |
Dividends: | |
Real Estate: | |
Businesses: | |
Expenses | |
Taxes: | |
Home Mortgage: | |
School Loan Payment: | |
Car Payment: | |
Credit Card Payment | |
Retail Payment | |
Other Expenses: | |
Child Expenses: | |
Source: CASHFLOW ((Kiyosaki and Lechter, 2002)
Auditor _________________
Passive Income = _________
(Cash flows from interest + Dividends + Real Estate + Businesses)
Total
Income: ________
Total
Expenses: _______
______________________
Monthly
Cash Flow: ____________
(Pay Check)
Usually, in an income statement as exemplified by the table of two columns above, the record begins with description or the source of the income and the cash flow or the amount earned from the source.
Balance Sheet
Assets | No. of Shares | Cost/Share | Liabilities |
Stocks/Mutual’s CDs | Home Mortgage: | ||
School Loans: | |||
Car Loans: | |||
Real Estate | Down Pay | Cost: | Credit Cards: |
Retail Debt: | |||
RE Mortgage: | |||
Businesses | Down Pay | Cost | |
Liability: (Business) | |||
Bank Loan: |
Source: CASHFLOW (Kiyosaki and Lechter, 2002)
As illustrated on the sample table above, before a managerial decision can be made, there is a clear-cut need to know the difference between the company asset and the company liability. Therefore, the managerial accountability which obviously means understanding company bookkeeping gives the manager an accurate control over company finances as well as subsequent company future (Pratt, 2003; Kiyosaki and Lechter, 2002).
Consequently, the liquidity ratios, the profitability ratios, and the solvency ratios can be used for wage negotiations, takeovers and mergers, and private share purchases (Keown, Petty, Scott, and Martin, 1998; Hunt, Weygandt, Kieso, and Kimmel, 2003).
Financial Documents
Income 1. 2. ↓ |
Expense 1. 2. ↓ |
Assets 1. 2. ↓ | Liabilities 1. 2. ↓ |
Consequently, decision-making capability requires the precise examination and understanding of these two documents, as exemplified above, which will likewise allow recognition of contracts, trends, requirements of the consumers and vendors, and especially the route that the money is streaming(Pratt, 2003; Albrecht et al, 2002 Kiyosaki and Lechter, 2002). In this regard, Warren Buffet, a business tycoon who went up the ladder of riches through appropriate investments in America, Alan Greenspan, the then chairman of the Federal Reserve Board for almost 20 years, Paul O’Neill, who was a secretary of the treasury for sometime, all basically supposed the need for everyone to learn reading and writing financial statements (Kiyosaki and Lechter, 2002).
According to Kiyosaki and Lechter in 2002, “It is the direction of the cash flow in a financial statement that counts and not the glittery fool’s gold”.
Solvency ratio arises from debt to total assets. This is the link of total debt in excess of total assets. Solvency ratio, which is a relative amount, determines the proportion of total loan provided by creditors. This solvency ratio also supplies the required precise information about a company’s facility to survive losses without prejudice to creditors’ interest. Thus, when a company has small fraction of debt in relation to its overall assets, the company is seen to be at a vantage point and attractive to creditors considering the amount of shield prior to bankruptcy. Additionally, solvency ratio with small fraction of debt in relation to its overall assets apparently determines a company’s ability to get hold of extra sponsorships. The relationship is written as:
Solvency ratio = Debt to total assets = Total debt
Total assets
(Hunt, Weygandt, Kieso, and Kimmel, 2003).
Meanwhile, the profitability ratio arising from return on common stockholders equity is actually the link of net income in excess of common stockholders equity. The ratio, which is the relative amount, determines the productivity of the proprietors’ outlay. In cases where this profitability ratio of common stockholders equity is found to be higher than the rate of return on total assets ratio, then, clearly, this indicates that the company employed creditor sources. As such, the company is satisfactorily operating on the equity. However, a company operating on equities or on loans apparently boosts the company’s financial risk. Nonetheless, equities or loans improve sustainable income every time the rates of return on assets go beyond the expenditure of liabilities. The relationship is written as:
Profitability ratio = Return on common = Net income
Common stockholders’ Common stockholders’
Equity Equity
(Hunt, Weygandt, Kieso, and Kimmel, 2003).
The liquidity ratio or the current ratio is the link of current assets in excess of current liabilities. To such an extent, the relative amount determines interim debit disbursement competency of a company. Obviously, this ratio is a clear marker that the company can pay current liabilities through the stream of money generated by current company assets. Typically, this ratio is known as the working capital which apparently also discloses the fact that the finer ratio means finer interim solvency. The relationship is written as:
Liquidity ratio = Current ratio = Current assets
Current liabilities
(Hunt, Weygandt, Kieso, and Kimmel, 2003).
On the other hand, profitability ratio can be computed using return on assets and return on common stockholders equity. The return on assets ratio is the link of net income in excess of total assets or total chattels. The ratio, which is the relative amount, determines the wide-ranging productivity of employed chattels. To such an extent, the ratio which is likewise the relative amount determines the disposable income. This disposable income or profit is actually the per dollar sales turnover. The relationship is written as:
Profitability ratio = Return on assets = Net income
Total assets
(Hunt, Weygandt, Kieso, and Kimmel, 2003).
Theoretical Framework
Conventional managerial financial decisions and corporate valuations are based on financial statements analyses. This is because the two essential manuscripts, the monthly income statement and balance sheet statements illustrate an official sheer portrait of a company’s financial status. The two manuscripts or documents contain comprehensible company profile in terms of figures revealing vital information like a ‘blood test or an x-ray’ as it reflects Net Income, Total Assets, Total equity, Total Debt, Total Liabilities, Total Revenue, Total Cost, Current assets, Current Liabilities, Net present value, and Market Value among others. Otherwise, the financial statement illustrates company status in terms of liquidity, profitability, and solvency (Pratt, 2003; Hunt, Weygandt, Kieso, and Kimmel, 2003; Albrecht, Stice, Stice, and Skousen, 2002; Kiyosaki and Lechter, 2002; Ross, Westerfield, Jordan, 1996):
Aim of the Study
The researcher’s aim in conducting this research is to establish if indeed financial statements underpins financial decisions and corporate valuations using banks’ official economic declarations.
Statement of the Problem
The researcher is interested to discover if indeed financial statements help in financial decisions and corporate valuations of Compass Group PLC, Toronto Dominion Bank, Harris Corp, Morgan Stanley, and Boeing Co., banks official economic declarations.
Specifically the researcher was directed to answer the following questions:
1. What is the company profile of the selected banks of the
2. Are the liquidity ratios, the profitability ratios, and the solvency ratios used for wage negotiations, takeovers and mergers, and private share purchases?
3. Do selected firms use income, expenditure or balances in financial statements in financial decisions?
4. What is the firm value of the selected banks of the
5. Do Financial Statements Help in Financial Decisions and Corporate Valuations?
Hypotheses
1. Ho: There is no company profile of the selected banks of the United State of America in terms of: a) Net Income; b) Total Assets; c) Total equity; d) Total Debt; e) Total Liabilities; f) Total Revenue; and g) Market Value;
2. Ho: The liquidity ratios, the profitability ratios, and the solvency ratios are not used for wage negotiations, takeovers and mergers, and private share purchases;
3. Ho: Selected firms do not use income, expenditure or balances in financial statements in financial decisions;
4 Ho: There is no firm value of the selected banks of the
5. Ho: Financial statements do not help in financial decisions and corporate valuations.
