Financial Ratios in Evaluating the Financial Performance of a Business

The paper will discuss the use financial ratios in evaluating the financial performance of a business. Firstly, the discussion will identify two companies that have received negative rating from a financial agency. Secondly, the paper will use a hypothetical scenario to determine ratios that would be utilized in making an investment strategy.

Negative Rating

One of the companies that have received a negative rating is Coca Cola. Coca Cola received a negative credit ratio which was impacted by the debt ratio (Standard & Poors.com, 2017). The credit rating of Coca Cola was lowered due to the increase in credit levels of the company. The other company that received a negative rating was Watco Company. The negative credit rating was attributed to Watco’s debt to EBITDA ratio (Moodys.com, 2017).

The ratios that confirm the agencies’ ratings are debt ratio and the debt to EBITDA ratio. The two ratios are similar since they evaluate the debt level of the company. The EBITDA ratio differs from debt ratio since it indicates the number of years that the company will take to settle the debt. The rating of Coca Cola is likely to improve due to the increase in cash flow. The rating of Watco is likely to remain negative since the company requires addition funding to finance acquisition (Moodys.com, 2017).

Investment Strategy

            The two companies in which the money would be invested are Apple Inc. and NVIDIA. One of the ratios that would be used to determine the investment strategy is net profit margin ratio. The net profit margin for the two companies increased in the year 2017 which is an indication that the earnings per share would improve in future. The other ratio that would be used to determine the strategy is the return on equity. The return on equity for NVIDIA and Apple Inc. was 44.23% and 36.87% (Yahoo Finance, 2017). The ratios are likely to increase in the next five years since the two firms have created a competitive edge in their respective industries.

References

Standard & Poors (2017). The Coca-Cola Co. Retrieved 5 January 2018, from

https://www.standardandpoors.com/en_US/web/guest/ratings/entity/-/org-details/sectorCode/CORP/entityId/100511

Moodys.com (2017). Moody’s Changes Watco’s Ratings Outlook to Negative, Affirms B1

Corporate Family Rating. Retrieved 5 January 2018, from https://www.moodys.com/research/Moodys-changes-Watcos-ratings-outlook-to-negative-affirms-B1-Corporate--PR_364279

Yahoo Finance. (2018). AAPL Key Statistics | Apple Inc. Stock. Retrieved 5 January 2018, from

https://finance.yahoo.com/quote/AAPL/key-statistics?p=AAPL

Yahoo Finance. (2018). NVDA Key Statistics | NVIDIA Corporation Stock. Retrieved 5 January

2018, from https://finance.yahoo.com/quote/NVDA/key-statistics?p=NVDA