Financial Trends Paper - Essay Example

Financial ratios My selected fortune 500 company Chevron was placed in the 5th position in terms of revenue in Fortune 500, 2005. In 2005 Chevron had reported annual revenues of $193 billion and a total profit of $ 14 billion (5 year financials, www.chevron.com). Chevron's revenues show a positive improvement starting from $ 103 billion in 2001 and except for the year 2002 revenues are continually increasing. The net income has also increased throughout the years 2001 to 2005 thus giving increased dividends to share holders.

This also points to expansion in company and better utilization of assets to result in increased sales and profitability. We also see that return on equity for the last 3 years is in the range of 20 to 29% which makes Chevron a prized stock to hold and trade in. Also if we were to analyze the debt/equity ratios the decreasing leverage of the company has correspondingly increased not only its profitability but also increasing return on assets and increase in the net profit margin (money central, ten year summary).

Key Financial Ratios20052004200320022001Return on assets11.20%14.30%8.87%1.46%4.24%Return on equity22.50%29.47%19.92%3.58%9.68%Net Profit Margin7.28%8.83%6.05%1.15%3.16%Debt/Equity0.210.250.350.510.51The ratios by themselves only give part of the picture; one has to compare them over the years and with similar comparable companies to gain any meaningful insight.Financial ratios 2The article I am summarizing was published in Economist "The ones that get away: Accounts are increasingly more art than science".

The author introduces the argument that although net profits of Amazon, online retailer, had fallen substantially while that of Sprint, telecom, had increased significantly share prices rose for both companies (Economist, 00130613). Author quotes Enron and WorldCom and stresses that people have become shy of profitability figures as these figures tend to be "malleable" (Economist, 00130613). There is a further argument that these errors start to creep in because companies are increasingly making use of estimates in their financial statements.

The accrual method of accounting where expenses and revenues are entered into accounts when "incurred" (Economist, 00130613) have made the issue difficult and to compound it fair value accounting practices have introduced their own difficulties. Now in attempt to show current worth of the assets and liabilities many estimates may be different from reality. Estimates are only estimates and are prone to adjustments - a recent study by Harvard and Chicago Business Schools found evidence of fiddling which inflated profits.

Another worry is that forward looking estimations are not at all useful to investors in calculating future cash flows and earnings. Another study focused on historic cash flows as a predictor of company's performance. It was found that although cash flows did parallel company's health, addition of estimation moved the company's health predictions way off the mark. Fair Value practice estimations are very difficult to apply to those projections that are based on management estimations (Enron is cited as a case in point).

Estimations will not go away, they will have to be scrutinized well by auditors and thus auditors' impartiality is very important. It is the objectivity of the evaluator that would separate good estimation from something way off the mark. Also investors will have to tread with numbers very carefully, and investors should be helped by more forthrightness by respective companies.Another aspect that might help is regular disclosure by companies that how their estimates in previous years stood with test of times, thus giving investors clear indication how to interpret company's accounting estimations.

Also companies should give clear distinction between how much of their figures are based on actual revenues and how much on estimation! (Economist)Financial ratios 31. http://www.chevron.com/investor/annual/2005/financials_5financial.asp. Retrieved 16th December, 2006.2. http://moneycentral.msn.com/investor/invsub/results/compare.aspPage=TenYearSummary&Symbol=CVX. Retrieved 16th December, 2006.3. The ones that get away. Economist. 00130613, 7/30/2005, Vol. 376, Issue 8437