An important talent for financial analyzers, accountants, and various financial experts is financial report evaluation, the process of analyzing a company’s financial reports to formulate plans. Horizontal and vertical analysis are typical approaches to analyzing financial statements (Akee et al., 2019). This knowledge helps financial analysts analyze a company’s financial data and spot trends and patterns. Also, Ratio analysis is a mathematical approach to analyzing financial documents like the balance sheet and income report to learn about a company’s liquidity, operational efficiencies, and profitability. Among the most important aspects of basic equity research is ratio analysis. Investors and analysts use ratio analysis to assess a company’s financial health by looking at financial statements from the past and the present (Jeong et al., 2018).
When looking at a company’s performance through time, comparative data may show how it has changed and be used to make projections about its future. This information may be used to evaluate a company’s performance relative to its competitors in the same field and to compare the company’s financial health to that of the industry. This paper reports Sherwin-Williams Co’s financial analysis to aid investors in determining whether SW is a buy (hold) or sell a stock through the evaluation of supplementary ratios, horizontal and vertical analysis, and, further concentrating on the principal ratios, namely, liquidity, efficiency, profitability, and solvency.
Firstly, helping investors decide whether or not to purchase (hold) or sell SW is more important than analyzing whether the recent uptick in sales is sustainable (Jeong et al., 2018). In addition to reviewing the sales figures, it is critical to read the complete press statement to understand what management had to say about the quarter. The data and remarks might reveal if the organization experienced growth or just received a windfall (Katoka and Dostal, 2022).
In general, smaller enterprises with revenues of $100 million to $1 billion should expand at a rate of 10% each year. To be of interest, larger enterprises should expand at least 3% each year. Finally, evaluate a company’s sales increase from last year and the previous quarter. If quarterly sales increase, it is typically another encouraging indicator. Every income statement item is restated as a percentage of net sales due to Sherwin-Williams Co (NYS: SHW) vertical analysis. Net sales are shown as 100% and were 11,855,602 for Year 1, 11,339,304 for Year 2, and 11,129,533 for Year 3.
Horizontal analysis for Sherwin-Williams Co, on the other hand, examines financial statement numbers across three years (Akee et al., 2019). All balance sheets and income statement amounts for analysis are given as a percentage of the reference year amounts. The sums from three years ago are shown as 100%. The reference year amounts will split the most recent years’ amounts. Horizontal analysis often displays percentage changes from the baseline period. In years 2 and 3, income climbed from 11,339,304 to 11,855,602. In base year 2, Sherwin-Williams Co recorded a gross profit of $5,559,226 and retained sales of 11,339,304.
In the current fiscal year 3, XYZ recorded a net profit of $5,922,265 and retained profits of $11,855,602. As a result, its gross profit income has increased by 1.018911101, and its sales profits have increased by 1.00 yearly. As a result, Sherwin-Williams Co’s income increased by 100%.
On the other hand, Sherwin-Williams Co liquidity ratio study aids in determining a company’s short-term solvency. Furthermore, it assures that a company has an unbroken flow of cash to cover its current liabilities of 2,829,179, 2,141,859, and 2,680,666 for Y1, Y2, and Y3. Working Capital, Current Ratio, and Quick Ratio for Y3 are 11.82%, 1.28, and 0.90, respectively, whereas they are 8.93%, 1.24, and 0.77 for Y2.
A current ratio of less than 2 often implies that Sherwin-Williams Co (The) (NYS: SHW) does not have enough assets to cover its short-term obligations. To put it another way, Sherwin-Williams Co (The) (NYS: SHW) is increasing its sales faster than it can finance them. This condition may result in insolvency. It is because Sherwin-Williams Co (The) (NYS: SHW) is striving to balance the number of consumers eager to buy its products with its ability to fund them.
Consequently, for investors’ attraction, comparing efficiency ratios might provide perspective into how the organization performs compared to its competitors. Overall, efficiency and profitability percentages have a significant link (Jeong et al., 2018). Companies become affluent when they allocate their resources efficiently. As a result, if the efficiency rates have grown over time, it may signal that the business has gotten more profitable.
Efficiency ratios assess a company’s capacity to efficiently utilize its assets and manage its obligations in the present or short term. The company’s inventory turnover ratio is 1.96 for Y2 and 2.00 for Y3. This shows that the company is correctly managing its inventory because it sold more than 100% of its inventory for the year. For Y3 and Y2, the asset turnover ratios would be 1.76 and 1.96, respectively. In other words, the corporation earned 176% to 196% of its assets in cents.
Overall Profit Margin, Gross Profit Margin, Return on Equity, and Earnings per Share (EPS) are 0.49, 0.49, 6.41, and 135498.68 for Y2, and 0.50, 0.50, 3.15, and 595809.30 for Y3. A significant gross profit margin proportion shows that core operations are more effective since they can cover operating expenses, fixed assets, dividends, and amortization while still delivering the business’s net earnings.
The debt-to-asset ratios for Y2 and Y3 are 1.21 and 1.39, respectively. This ratio gauges the amount to which a company’s debt supports its assets and is a measure of financial risk. In other words, the percentage of a company’s total assets is supported by debt (Akee et al., 2019). Since this ratio is high, the risk of insolvency is higher. Consequently, For Y2 and Y3, the debt-to-equity ratios are 4.73 and 2.59, respectively. This ratio compares the amount of debt a corporation has to its equity. Because this ratio is large, it suggests a greater danger of insolvency.
Moreover, solvency refers to a company’s ability to pay or meet its long-term spending obligations, including principal and accrued interest on bank loans or bonds. The ratios that evaluate this talent are known as “Solvency Ratios.” These ratios, one approach to measuring a company’s balance sheet, represent a company’s long-term monetary sustainability and health. Solvency ratios provide essential insight into a company’s financial framework and whether it has sufficient cash flows to fulfill payment on long-term debt obligations when they fall due (Jeong et al., 2018).
For Y2 and Y3, cash flow-based interest coverage is 0.04 and 0.18, respectively. This ratio assesses a company’s capacity to satisfy debt interest payments with current profits before interest and taxes (EBIT). Since it has lower interest rate coverage, it suggests a higher risk of insolvency and less certainty that a firm will be able to fulfill its debt commitments.
In conclusion, I believe the failing company must be sold. In light of the company’s current financial obligations, liquid assets are insufficient to satisfy such obligations. The company has run out of money and cannot function or meet its financial commitments. Due to mismanagement and a lack of funds, Macy’s can go bankrupt. Since it has more debt than assets, the corporation has trouble meeting its financial obligations when they come due.
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