FINANCE (ratio analysis) Essay Example | Topics and Well Written Essays - 750 words

FINANCE (ratio analysis) - Essay Example 1.3.1 Both Interest Cover and capital gearing ratios proved that BAE uses more debt than Cobham to operate its business. The risk of BAE not being able to pay its debt is certainly higher than Cobham's. 2.2.1 ROCE measures the profitability of the company in capital investment. Even though ROCE declined for Cobham from 2004 to 2005, but it is still higher than both values of ROCE for BAE in both years. 2.3.1 Profit margin measures earnings from every dollarof sales. It is used to compare companies that operate within the same industry. Even though Cobham profit margin has decreased from 17% in 2004 to 14% n 2005, but it is still higher than BAE' profit margin which averaged about 8% during 2004 and 2005. In 2005, Cobham retained $0.14 as profit from every dollar of sales while BAE retained $0.08 for every dollar of sales it generated. This indicates that Cobham has better control over its costs and is more profitable than BAE. 3.1.1 Working capital measures company operations efficiency and predicts short range operational. By comparing BAE and Cobham's working capital, it was found that Cobham is more capable than BAE in paying its short term debts. 3.2.1 This test is better than the working capital ratio because it measures whether a firm has enough short-term assets to cover its liabilities without selling inventory. Both firms exhibit less than one value indicating the difficulty I paying debt, However, Cobham has higher score than BAE and thus Cobham has better financial situation than BAE. 3.3 Summary of Liquidity Ratios 3.3.1 Working capital and liquidity test suggest that Cobham was more capable than BAE in meeting its short term liabilities in 2004 and 2005.