Different Types of Ratio for the New York University and the University of Sheffield - Case Study Example

Name Tutor Course Date Different types of ratio for New York University and University of Sheffield Introduction New York University consolidated accounts indicated total assets of $ 12258579 which point out an increase from $ 11193630 in 2012. Liabilities also increased to a total of $ 6621168 in 2013from a total of $ 6,204620 in 2012. According to the 2012 to 2013 annual auditors’ report for New York University 2012 revenue bonds issued by DASNY totaled to $55035. These were at 4.0% to 5.0% interest rates and were on behalf of obligated group. $31110 taxable revenue bonds were also issued at 0.4% to 3.6% interest. In 2012 the University has total bonds owing of $2450554 in Dormitory Authority of the state of New York. NYU on itself issued bonds totaling to $128300. It accumulated to bonds payable at $3191772 at the end of the year. University of Sheffield on the other hand has had short term investments which generated less income of 1600000 in 2013 compared to 1700000 generated in 2012. The university is still paying for a 15 years term loan borrowed in 2007 with a residual debt of 2200000, with 2700000 paid in 2013 at a fixed rate of 5.4750% and variable rate of 0.6832%. 40 years private placement was at a fixed rate of 5.3300% with a debt of 59800000 still outstanding dated May 2007. However, ratio analysis of the two universities will ascertain of their financial stability despite their income sources and investments or debts from external sources. Ratio analysis comparison The ratio analysis comparison involves two organizations in the same industry. These are New York University in University of Sheffield. Types of ratios applied for the two universities include Short term solvency or liquidity ratios, Long-term solvency or financial leverage ratios, Asset management or turnover ratios and Profitability ratios. I.) Short term solvency or liquidity ratios Current ratios Current ratio = Current assets/Current liabilities New York University Current assets = Cash and cash equivalents, short term investments, accounts and loans receivable, patent accounts receivable, contributions receivables (less than one year), disaster related receivable, other assets, deposits with trustees, long term investments 2013= 1095001 + 360179 +316182 + 173738 + 90021 + 287778 + 28680 + 202203 + 3619637=6173419 2012= 1417647 + 361964 + 304419 + 113328 + 247442 + 33568+ 265381 + 2959755= 5703504 Current liabilities = Accounts payable and accrued expenses, disaster related accounts payable and accrued expenses, deferred revenue, outstanding losses and loss adjustment expenses, other leasing obligations, accrued benefit obligation, accrued postretirement obligations, Asset retirement obligation 2013= 922201 + 79858 +842883 +215972 + 86990 +165985 + 457109 + 162561 =2933559 2012= 934157 + 825525 +188962 +296888 +546900 + 138728 = 2931160 Current ratio = 2013: 26173419 / 2933559 = 8.9221 2012:5703504 / 2931160 = 1.9458 University of Sheffield 2013 = 323900000 / 264600000 =1.5190 2012 = 391000000 /257400000 =1.5190 Both the institutions are able to meet their current obligation using current assets without touching on their fixed and other assets as indicated by the ration which is more than one. However, ratios of University of Sheffield indicate a threat to this ability due to a decline in the ratio from 1.5190 in 2012 to 1.2241 in 2013. Although it is still able for now, there is a possibility that the institution might not be able to meet current obligations using current assets in the future. New York University on the other hand is performing well with increased current ability by a great margin from 1.9458 in 2012 to 8.9221 in 2013. Long-term liabilities = Bonds and notes payable, Security loan agreements payable, federal grants refundable 2013= 3607614 + 2634 + 77361 =3687609 2012= 3191772 + 6023 + 75665 = 3273460 Quick ratio = (Current assets – Inventory)/Current liabilities New York University 2013: (26173419- 38441) / 2933559 =8.9090 2012: (5703504- 33232) / 2931160 =1.9344 University of Sheffield 2013= (323900000 - 800000) / 264600000 =1.2211 2012 = (391000000- 800000) / 257400000 =1.5159 Cash ratio = Cash/Current liabilities New York University 2013: 1095001 / 2933559 =0.3733 2012: 1417647 / 2931160 =0.4836 University of Sheffield 2013: 35600000 / 264600000=1.3454 2012: 402000000 / 257400000=1.5618 Networking capital to total assets = Networking capital/Total assets (Networking capital = Current assets – Current liabilities) New York University 2013:(26173419 - 2933559) / 12258579 =1.8958 2012: (5703504 - 2931160) / 11193630 =0.2477 University of Sheffield 2013: (323900000- 264600000) / 1710700000 =0.0347 2012: (391000000- 257400000) / 1637900000 =0.0816 Interval measure =Current assets / Average daily operating costs (Average daily operating costs = (Cost of goods sold + Total operating costs) / 365 days) New York University 2013: Average daily operating costs = 5954952/365 days = 16314.937 Interval measure = 2322899 /16314.937 = 142.3787 2012: Average daily operating costs = 5333611/ 365 days = 14612.6329 Interval measure = 2444800 /14612.6329 = 1672.8539 University of Sheffield 2013: Average daily operating costs = 46500000/365 days = 12397.26 Interval measure = 323900000 /12397.26 = 26126.7409 2012: Average daily operating costs = 427600000/365 days = 1171506.85 Interval measure = 391000000 /1171506.85 = 333.7582 II.) Long-term solvency, or financial leverage, ratios Total debt ratio = (Total assets – Total equity)/Total assets New York University 2013: (12258579 - 5637411) / 12258579 =0.5401 2012: (11193630 - 4989010) / 11193630 = 5.5430 University of Sheffield 2013: (1710700000–7300000) / 1710700000 =0.9573 2012: (1637900000 - 65600000) / 1637900000 =0.9599 Debt to equity ratio = Total debt/ Total equity New York University 2013:3687609 / 5637411 = 0.6541 2012:3273460 / 4989010 =0.6561 University of Sheffield 2013: 84500000 /7300000 = 1.1575 2012: 84500000 /65600000 =1.2881 Increasing debt to equity ratio and capital gearing ratio over the two years period for both universities indicates an increasing level of risks in New York University and the University of Sheffield. Increase in vulnerability might lead to bankruptcy since the company will have to settle its debts even at low sales. However, NYU marks an insignificant increase. Equity multiplier = Total assets/Total equity New York University 2013: 12258579 /5637411 2012: 11193630 / 4989010 University of Sheffield 2013: 1710700000 / 7300000 =234.3425 2012: 1637900000/ 65600000 =24.9680 Long-term debt ratio = Long-term debt/ (Long-term debt + Total equity) New York University 2013: 3687609 / (3687609 +5637411)=0.3955 2012: 3273460 / (3273460 + 4989010) =0.3962 University of Sheffield 2013:304800000 / (304800000 + 7300000) =0.9761 2012:280600000 / (280600000 + 65600000) =0.8105 Times interest earned ratio = EBIT/Interest New York University 2013: 494099 / 154302 = 3.2023 2012:431820/125847 =3.4313 University of Sheffield 2013: 14800000 / 4900000 = 3.0204 2012: 20100000 /5100000 =3.9412 Cash coverage ratio = (EBIT + Deprecation) / Interest New York University 2013: (494099 + 346600) / 154302 =5.4484 2012: (431820 + 333730) / 125847 = 6.0832 University of Sheffield 2013: (14800000 + 40800000) / 4900000 =11.3469 2012: (20100000 + 38000000) / 5100000 =11.3922 III.) Asset management or turnover ratios Inventory turnover = Cost of Goods Sold/Inventory New York University 2013: 5954952 / 38441 = 154.9115 2012: 5333611 /33232 = 160.4962 University of Sheffield 2013: 46500000 / 800000 = 581.25 534.5 2012: 427600000 / 800000 = 534.5 Days’ sales in Inventory = 365 days/ Inventory turnover New York University 2013: 365 days /154.9115 = 2.3562 2012: 365 days / 160.4962 =2.2742 University of Sheffield 2013: 365 days / 581.25 = 0.6280 2012: 365 days / 534.5 =0.6829 Receivables turn over = Sales/ Accounts receivable New York University 2013:442318/ 360178 = 1.2281 2012: 401313/ 361964 = 1.1087 University of Sheffield 2013:68300000 / 55500000 = 1.2306 2012: 60200000 / 60800000 = 0.9901 Days’ sales receivables = 365 days/ Receivables turnover New York University 2013:365 days / 1.2281 = 297.2071 2012: 365 days / 1.1087 = 329.2144 University of Sheffield 2013:365 days / 1.2306 = 296.6033 2012: 365 days / 0.9901 = 368.6496 Net Working Capital (NWC) turnover = Sales/NWC New York University 2013: 442318 / 23239860 = 0.0190 2012: 401313 / 2772344 = 0.1448 University of Sheffield 2013: 68300000 / 59300000 = 1.1518 2012: 60200000 / 133600000 = 0.4506 Fixed asset turnover = Sales/ Net fixed assets 2013: 442318 / 5739608 = 0.0771 2012: 401313 / 5160590 = 0.0778 University of Sheffield 2013: 68300000 /696300000 = 0.0981 2012: 60200000 / 626400000 = 0.0961 Total asset turnover = Sales/ Total assets New York University 2013: 442318 / 12258579 =0.0361 2012: 401313 / 11193630 = 0.0359 University of Sheffield 2013: 68300000 / 1710700000 = 0.0399 2012: 60200000 / 1 637 900 000 = 0.03675 IV.) Profitability ratios Profit margin =Net Income/ Sales 2013: 5974964/ 442318 = 13.5083 2012: 5681235 / 401313 =14.1566 University of Sheffield 2013: 479800000 / 68300000 = 70.2489 2012: 446900000 / 60200000 = 7.4236 The profits margins are decreasing over two year period for New York University from 14.1566 in 2012 to 13.5083 in 2013. This is an indicator of a threatened continuity of NYU. The Price Water House Coopers in New York state that, the better financial position is an assurance for sustainability and continuing growth (New York University: Auditor’s report, 2013). The profits margins are increasing over two year period for University of Sheffield from 7.4236 in 2012 to 70.2489 in 2013. This is an indicator of a better continuity of the university. According to Tony Pedder, chairman of the University of Sheffield Council, assured continuity and Growth University of Sheffield is indicated by better financial position since the increased ratios are an assurance for sustainability (University of Sheffield annual report for 2012 - 2013). Return on assets (ROA) = Net Income/Total assets New York University 2013: 5974964 / 12258579 =0.4793 2012: 5681235 / 11193630 = 0.5075 University of Sheffield 2013: 479800000 / 1710700000 = 70.2489 2012: 446900000 / 1 637 900 000 =7.4236 New York University has low asset turnover which is also decreasing compared to the University of Sheffield, indicating a higher profit margin. Over the two years period, net asset turnover is following a decreasing trend. On the other hand, University of Sheffield has very high asset turnover especially in 2013 (70.2489) which is also increasing compared to New York University. This is reflected in the decreasing and lower profit margin. Over the two year period, net asset turnover is following an increasing trend. Return on equity (ROE) = Net income/Total equity ROE = Net Income /Sales * Sales /Assets *Assets /Equity New York University 2013: 5974964 / 1588203 = 3.7621 2012: 5681235 / 4989010 = 4.1598 University of Sheffield 2013: 479800000 / 7300000 = 6.5726 2012: 446900000 / 65600000= 6.8125 Written explanation for the ratios Both University of Sheffield and New York University employ ratio analysis in evaluating their company performances. They both use profit margins of net income to sales in analyzing profitability. University of Sheffield indicates a growing trend of its profit margin since 2012 of 7.4236 to 70.2489 in 2013. However, New York University is not showing a similar trend having 14.1566 in 2012 and13.5083 in 2013 but indicates a lower value. This means that sales of both the universities contribute to less than half of the profits realized. Comparing the interest cover ratio for the two institutions, both seem to have an efficient interest debt management system. However, both ratios are reducing indicating a threat in the interest management system. Working capital ratios help in evaluation of its earnings on investments, assets and sales. Efficiency ratios are also utilized in the company to determine efficiency in management of balance sheet items. Cash coverage ratios for both universities are reducing. Efficiency evaluation enables managers to influence the cash position of a firm and if appropriately employed, allocation of resources will also be proficient (Weetman, 2010). The company summarizes liquidity ratios in its structure ratios which include current ratio, solvency and quick ratio. The ability of the company Ratio analysis for the two organizations has highlighted important elements to be viewed from which an analysis is drawn. Other than reviewing the whole debtor information over the period to determine debtor turn over, the ratio indicates it for quicker review. Profits generated from a single service offered by New York University or University of Sheffield can be easily reviewed by checking profit per sale ratio. There are however a number of limitations in using ratio analysis. Due to firms operating in different environments, market structures and industries, comparison of companies’ performances might be faulty. This can be solved by comparing only firms operating in similar industries, using similar ratio categories and rationalizing the rates to consider business environments. Since ratios utilize accounting information, the analysis might be less useful. This is because some accounting policies limit comparison through estimates and assumptions. It also utilizes historical information which might not be needed by users. This is solved by implementing certain intervals for calculation of the ratios and updated calculation to the recent period. Companies need to use ratio analysis in identifying relationships between different components of financial accounts. They serve as way of analyzing and understanding the financial statements. Financial data relating to the ratio category is further examined to give an efficient interpretation. Through ratio analysis, the Companies are able to determine their ability to meet current financial obligations. Financial statements are lengthy and analyzing them to determine company’s performance might be time consuming. Ratio analysis abridges the statements. Performance trend of companies operating in the same industry employing same kinds of ratios can be compared using ratio analysis. The performance varies in different periods creating a trend that can be used to forecast future performance and facilitate policy formation (McLaney, E. &P.Attrill, (2010). The organizations differ in some ratios like the employee ratios and consumer ratios. They all evaluate their employee performance and welfare through profits per employee, turn over, working capital and others. Conclusion It is easier to compare performance of New York University and that of University of Sheffield through the ratios other than the lengthy financial statements. A part from comparing performance of different companies in same industry, a single company performance trend can be analyzed over a period of time by comparing the financial ratios. Through ratio analysis, the performance of New York University analyzed over the two-year period. The performance varies in different periods creating a trend that can be used to forecast future performance and facilitate policy formation. Ratio analysis enables companies to determine their performance through profitability, liquidity efficiency ratios and others. They provide a quick review of the performance by users of financial statements and stakeholders. New York University and University of Sheffield are both institutions in the education sector with their campuses in the United Arab Emirates and employ ratio analysis. This facilitates an easier comparison of the performance for both higher learning institutions. They also employ ratios like ROCE in evaluation of its performance and continuity which facilitates an easier review of their performance. Other than the benefits drawn by a company in using ratio analysis, there are also some limitations. Some limitations are easily negated but there are limitations which cannot be resolved with respect to accounting policies. References Price Waters Coopers, (2013). New York University Consolidated Financial Statements August 31, 2013 and 2012.New York University. Retrieved from: http://www.nyu.edu/financial.services/cdv/pdf/CFS_2013.pdf The University of Sheffield, (2013).Annual report and financial statements 2012- 2013. University of Sheffield. Retrieved from: https://www.sheffield.ac.uk/polopoly_fs/1.346935!/file/annualreport2012_13.pdf McLaney, E.J., (2011). Business Finance Theory and Practice.9th Edition, Harlow, England: FT Prentice Hall. (or 8th Edition) McLaney, E. &P.Attrill, (2010).Accounting an Introduction. 5th Edition, Harlow, England: Financial Times Prentice Hall. Read More