Ratio Analysis to Determine Corporate Health Essay Example for Free

Ratio Analysis to Determine Corporate Health Essay One must consider many factors before deciding whether or not to invest in a company. The following is an analysis and comparison of the health of two well known companies, Exxon and Wal-Mart. Some of the factors that were analyzed include current ration, inventory turnover, accounts receivable turnover, and days’ sales in inventory. Most of the values used for the calculations were obtained from Yahoo Finance. Current ratio evaluates a company’s ability to pay its short-term obligations (Wild, 2008). Exxon’s current ratio of 1. Â  indicates that it should not have any issues paying its short-term obligations. In contrast, Wal-Mart’s current ratio of 0. 88, indicates that the company’s current liabilities exceed current assets and thus investors should be doubtful of its ability to pay short-term obligations. Inventory turnover is another indicator of a company’s ability to pay short-term debt. Specifically, it is the number of times a company’s average inventory is sold during a period (Wild, 2008). Wal-Mart’s inventory turnover of 9. Â  indicates that it may be holding more inventory than it needs, and thus it may be using its assets in efficiently. Exxon’s inventory turnover of 28. 31 is more preferable, as long as inventory adequately meets demand (Wild, 2008). These numbers show that Wal-Mart may be having difficulties paying its short-term debt and thus caution should be warranted. Accounts receivable turnover measure the quality and liquidity of accounts receivable. Thus it indicates how often receivable are received and collected during the period (Wild, 2008). Exxon’s accounts receivable turnover is 15. Â  while Walmart’s is 107. 3. Exxon’s low turnover suggests management should consider stricter credit terms and more aggressive collection efforts to avoid its resources being tied up in accounts receivables. On the other hand, Wal-Mart’s high turnover implies the opposite; management should consider using more liberal credit terms. While accounts receivable turnover measures the liquidity of accounts receivables, days’ sales in inventory is useful in evaluating liquidity of inventory (Wild, 2008). Exxon’s days’ sales in inventory is 13. 2 and Wal-Mart’s is 38. Â  Exxon’s lower days’ sales in inventory value indicates that the company uses its resources more efficiently. Conclusion All things considered, Exxon appears to be a more solid company in which a first time stock-buyer should invest. While both are major companies, which appear to have solid numbers, Exxon seems to be the more stable and reliable company. Specifically Exxon seems to manage its assets better and seems more likely to be able to pay its short term debt. Nonetheless, one should invest in stock that he or she feels better represents his or her goals.