Sample Term Paper
The first ration which has been selected for this case is the current ratio. The current ratio can be obtained by dividing the total current assets of the company by its total current liabilities. This ratio expresses the working capital relationship of the current assets which means that what is the relationship between the company’s liabilities to its assets.
If we look at Philip Morris’s current ration it would tell us that it is on the rise means that the company has larger amount of assets as compared to its liabilities. If we further elaborate this it could be said that the current ratio would tell that weather or not the company have enough resources to pay its liabilities over the next year. The trend which we see in Philip Morris’s current ratio is that it is on a higher note like for instance if we take the current ratio for the year 2008 it is 1.47 which in other word means that for every dollar in current liabilities Philip Morris has 1.47 dollar in its current assets.
The second ratio which we have considered is the quick ratio. This ratio shows the company’s ability to pay its current liabilities from the most liquid assets. If we see the current ratio of Philip Morris its not a good sign reason being that the difference between the current ratio and the quick ration is almost double which in other words means that the company has holding lot of inventory. As inventories are not very highly liquid assets so when the company has to go out to pay their liabilities inventories would create a problem for them.
Next is the debt to equity ratio, this ratio is obtained by dividing the total debt with the total equity. This ratio measures how the company is dealing with its debt against the capital which is being implanted by the owners of the company. If the liabilities part of the ratio exceeds the equity or net worth of the ratio than it means that the creditors have more stake in the company as compared to the shareholders. The debt to equity ratio shows the proportion between equity and debt which the company is using to finance their assets. A higher debt to equity ratio means that the company has a hostile policy in financing their growth with debts. One thing which should be remembered in this regard is that if the ratio is greater than one than it shows that the company’s assets are mainly financed by debt and similarly a ratio which is less than one shows that majority of the asset’s financing is done with the equity. In the case of Philip Morris the company has a debt to equity ratio which is less than one which shoes a healthy sign. Similarly if the profitability side of the ratios is considered they are showing a healthy position and which we can also view from the statements of the company.
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