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Ratio 2009 2008
Current Ratio .89 1.13
Debt-to-Equity 527% 240%
Earnings Per Share $.96 $1.37
We can use financial ratios to evaluate a company's performance over time. Based on the 3 ratios above, how has the financial performance of DirecTV improved from 2008 to 2009? Are there any indications that it hasn't improved from year-to-year? Explain your answer using what you know about each of the three ratios.
To evaluate the financial performance of DirecTV from 2008 to 2009, we need to analyze the given ratios: Current Ratio, Debt-to-Equity Ratio, and Earnings Per Share.
1. Current Ratio:
The current ratio measures the company's ability to pay its short-term liabilities using its short-term assets. It is calculated by dividing current assets by current liabilities. A higher current ratio indicates a better ability to cover short-term liabilities.
In 2008, the current ratio was 1.13, while in 2009 it decreased to 0.89. A decrease in the current ratio suggests that DirecTV had a reduced ability to cover short-term liabilities in 2009 compared to 2008. This indicates a decline in financial performance in this specific aspect.
2. Debt-to-Equity Ratio:
The debt-to-equity ratio reflects the proportion of a company's financing that comes from debt (creditors) compared to equity (shareholders). It is calculated by dividing total debt by total equity and multiplying the result by 100 to express it as a percentage. A lower debt-to-equity ratio is generally considered better as it indicates a lower dependence on debt financing.
In 2008, the debt-to-equity ratio was 240%, while in 2009 it increased to 527%. The increase in this ratio suggests that DirecTV became more reliant on debt financing in 2009. This indicates a decline in financial performance in relation to the company's debt structure.
3. Earnings Per Share (EPS):
Earnings per share represents the portion of a company's profit allocated to each outstanding share of common stock. An increase in EPS generally indicates improved profitability.
In 2008, the EPS was $1.37, while in 2009 it decreased to $0.96. The decrease in EPS suggests a decline in DirecTV's profitability in 2009 compared to 2008. This indicates a decrease in financial performance in terms of profitability.
Overall, based on these ratios, the financial performance of DirecTV declined from 2008 to 2009. The decrease in the current ratio, increase in the debt-to-equity ratio, and decrease in EPS indicate a weaker financial position, decreased short-term liquidity, higher reliance on debt financing, and reduced profitability.