Write a report analyzing the most recent financial aspects of Pentair,INC - Research Paper Example

Financial Aspects of Pentair, Inc Financial Aspects of Pentair, Inc Ms. Cindy Baer President Topic: Ratio Analysis Report It isimportant to evaluate the performance of a company, both from a shareholders point-of-view and for business owners and managers as well. Financial ratio analysis is a handy tool when assessing a company’s performance as it helps analysts look beyond the obvious sales and production numbers. Of course, the results of ratio analysis are definitive authority on the performance of a company but true indicators of any hidden performance issues it may be facing.

However, there are other uses for ratios as well. Their results are benchmarks for a company’s performance. Every future performance will be measured against these and other companies’ ratios. Ratio analysis also helps stakeholders who are not a direct part of the business, analyze and assess a firm’s profitability and creditworthiness. In order to conduct ratio analysis, the balance sheet and income statement provide the necessary figures and numbers. These financial statements are an integral part of the annual report by a company.

In addition to the balance sheet and the income statement, there are also the statement of retained earning and cash flow statement. From these statements, the financial analyst must select the important information and interpret its analysis. This ratio analysis is important for an understanding of the company’s performance and condition. By examining Pentair Inc’s financial ratios, a clear picture of the company’s performance will emerge. Liquidity Analysis: 1. Current Ratio = 2.1:1 ("Pentair inc" 2012) 2.

Quick Ratio = 1.1:1 ("Pentair inc" 2012) When compared to the rest of the industry, these ratios are quite small but overall, they predict that the performance of the company is satisfactory. The Current ratio is 2.1 that depicts that Pentair INC. has slightly overinvested in working capital. In addition, the quick ratio of 1.1 indicates the same. The quick ratio is less than current ratio indicating that the company may face cash flow problems in the future because of the tied up working capital.

Both these figures are close to the industry average. Analyzing Profitability: 1. Return on Assets (ROA) = 5.44% ("Pentair inc" 2012) 2. Return on Equity (ROE) = 2.20% ("Pentair inc" 2012) 3. Return on Capital Employed (ROCE)= 3.30% ("Pentair inc" 2012) 4. Earnings per Common share (EPS) = $ 0.64 per share ("Pentair inc" 2012) ROCE indicates that more than $3 is earned for every dollar that is invested by the company. But in order to get the true picture we will have to compare this figure with the previous quarter’s ROCE.

If ROCE has increased in the current quarter then the company has performed spectacularly by increasing sales without a proportionate increase in costs. Otherwise, there may be a problem with the control of costs. ROE is a ratio for shareholders, letting them how well their investment has performed. In the case of Pentair, the shareholders are getting 2.20% returns on their investment in the company, which is just a little less than industry average. EPS does not tell the actual income of the shareholder but rather indicates the shareholders share in the profit.

It is an important measure of a company’s performance but is heavily affected by both right and bonus share issues. Therefore, these must also be taken into account. Analyzing Productivity: The productivity ratios help figure out how well the firm’s assets are being managed.   1. Inventory Turnover = 5.5:1  ("Pentair inc" 2012) 2. Total Assets Turnover = 0.8:1 ("Pentair inc" 2012) 3. Accounts Receivable Turnover = 5.4:1("Pentair inc" 2012) An inventory turnover ratio of 5.5: 1 shows that the firm manages to turnover or completely sells its inventory 5.5 times. The firm seems to be in line with the industry average by minimizing investment in its inventory.

For every dollar invested in its assets, Pentair is generating 0.8 times the sales. Although this is quite low ratio indicating that, the company might by performing badly. However, studying the industry practices it becomes clear that the company is operating on the industry standards.   Pentair is quite effective at collecting debts and extending credit to customers according to the accounts receivable turnover. Analyzing Debt: 1. Debt to Equity Ratio = 66: 1("Pentair inc" 2012) 2. Debt to Assets Ratio = 55.

1:1("Pentair inc" 2012) These ratios are indicators of a company’s reliance on debt for financing its assets. The rule of thumb here is that the lower the ratio, the safer a company is. On the other hand, if a company has no or very little debt, it may be missing opportunities for investment and growth. In the case of Pentair, it has financed more than 50% of its capital by using external debt. This might seem dangerous but the figure is quite close to industry average indicating that it is a necessity of the business Pentair is operating in.

References Costales, S. B., & Szurovy, G. (1993). Guide to Understanding Financial Statements. McGraw. Keown, A. J. (2003). Foundations of finance: The logic and practice of financial management. Upper Saddle River, N.J: Prentice Hall. Pentair inc (PNR: New York). (2012, April 05). Bloomberg Businessweek. Retrieved from: http://investing.businessweek.com/research/stocks/financials/ratios.asp?ticker=PNR:US  Q4 and full year 2011 earnings release. (2012). Retrieved from: http://www.google.com/url?

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