1.1 Financial Health of Ameriprise Financial
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An investor will be primarily concerned on the return on investment and the capital appreciation generated from the successful trading of the company when entailed in an investment decision. He will thus seek the profitability and financial position of the firm. The investment risk is also an important element especially when consideration of investing funds is taking place. This necessitates the need of examining the financial stability of the organization too. The ratios calculated in section 1.5 will be analyzed in the following sections upon their appropriate category in order to evaluate the viability of investing in Ameriprise Financial.
1.2 Profitability of Ameriprise Financial Incorporation
The net income of Ameriprise Financial Incorporation decreased by 27.71% from 2004 to 2005, but increased by 9.93% from 2005 to 2006. Indeed this substantiates the profitability portrayed by the financial ratios calculated in section 1.5. The net income margin of the company faintly increased between 2005 and 2006. This implies that the net profit derived from every $100 of sales revenue is higher, revealing better managerial controls on the firm’s operating costs. The efficiency of management was also slightly better from 2005 as indicated by the return on equity. This ratio depicts the profits generated from the equity finance. A high percentage in the return on equity is always desirable because it signifies that the company’s profits are substantially safe from unexpected changes in the business environment, such as new competitive measures, adverse economic changes and more.
The only profitability ratio that showed a slight decrease was the return on assets. This pointed out lower effectiveness in the utilization of assets to generate profits. However such ratio may stem from an increase in total assets at the end of the year. In fact, the total assets increased by 11.87% last year. Thus such rise in assets may direct better profitability in coming year.
1.3 Financial Position of Ameriprise Financial Incorporation
An improvement in the current ratio was noted during 2006. This ratio portrays the ability of the current assets to cover the current liabilities. A higher current ratio means a greater working capital as can be noted by the 82.48% increase in working capital from 2005 to 2006. Good working capital management is important in an organization, because it ensures a sound liquidity position.
Even though the cash and cash equivalents of the company increased by 9.82% in 2006, the ability of such assets to cover the short term debts of the corporation slightly decreased by 0.23% as shown by the cash ratio in section 1.5. The two main current liabilities that led to such a higher proportionate increase in liquid debts are other liabilities, which increased by 79.14% and debts, which rose by 21.39%.
Another factor, which may have led to such decrease in the cash ratio is the receivables turnover that also diminished by 0.7 times. This activity ratio portrays the ability of management to collect debts. If effectiveness in debt collection decreases, the cash and cash equivalents will lessen, but the total current assets will be the same or rise in view of the turnover made, because the short-term debts due to the firm will be shown in the receivables section of the current assets. Such preposition fully reflects the financial ratios of Ameriprise Financial Incorporation, which showed a fall in the cash ratio, despite an increase in the current ratio was attained. Therefore we can contend that even though the working capital ratio improved, the cash management worsened in 2006.
1.4 Financial Stability of Ameriprise Financial Incorporation
The capital structure of Ameriprise Financial Incorporation is of a high-geared company as shown by the gearing ratio. High gearing in a company implies that the ratio of debt in relation to equity is high, signifying that the organization is mainly financed through debt. A high-geared company is usually a riskier corporation because the interest commitments derived from loans are greater. In practice, shareholders can survive a year or two without dividends, but if an organization fails to pay the interests due to lenders on time, legal proceedings will probably commence, directing the business enterprise into liquidation.
In financial analysis it is normally advisable to invest in high-geared firms when the financial performance is improving because the increase in profits will be spread among a small number of investors and return attained from investment will thus be higher. In the profitability section we noted that the profits improved by a low percentage. Being a high-geared company it is a favorable aspect for shareholders because the earnings per share are greater.
The times interest earned, which signifies the capability of the organization to pay for the interest cost derived from long term borrowings or other financial obligations decreased by 3.55 times during the year. This is a negative effect on the stability of the company. Upon examination of the balance sheet one can notice that the long term liabilities increased by 12.91%, while the rise in profitability was much less by 9.93% as noted in section 1.2.
1.5 Determination of Accounting Ratios
1.6 Concluding Remark – Feasibility of Investing in Ameriprise Financial
As explained in the previous sections, Ameriprise Financial Incorporation holds increasing profitability and a sound working capital. The main weakness noted in the financial position section was the ineffectiveness in the debt collection process from trade debtors, which lead adverse effects on the cash flow of the firm in relation to the current liabilities. In view of the above, we can state that Ameriprise Financial Incorporation holds a sound financial health. However, the investment decision is also significantly affected by the investor’s attitude towards risk. If the investor is a risk taker, he should invest in such corporation, because if the financial performance continues to improve, I envisage very good returns. Risk averse investors, on the other hand, ought to seek other investments in light of the high gearing of the company, which is portraying an increasing trend over the years.
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