XYZ Investment Portfolio

Investing in the right company is a matter of the analysis of the risk involved alongside other factors that will enable an investor to determine whether their investment will be beneficial in the long term. The investor’s individual circumstances determine their choice of investments. Depending on their risk tolerance, different investors will choose different choices. For high risk tolerance investors, their preference is towards stocks, international options and real estate whereas low risk tolerance investors prefer for the more stable government bonds and stocks in larger, well-known companies (Warren & Jones, 2018). In any case, determining the risk of an investment in any portfolio is key to knowing how to move forward. Among other things, this paper presents a risk assessment of five investment options and an executive summary pointing out the best investment choices for XYZ.

Portfolio Analysis 

For each of the five companies, five ratio indicators have been provided, thereby offering the investor with a clear picture of the company’s face-value performance. The table below shows a consolidated table embodying all five companies’ five key ratios:

From the above table, one can tell the key ratios provided and interpret their meaning to the risk of investing in the company. From the onset, it is clear that there is little risk tolerance for the investor, as they have chosen to invest in large companies such as Apple, Caterpillar and Northern Trust. This would provide some clue as to the risk tolerance of the investor, thereby reducing the chances of going for wild card investments.

The debt/asset ratio indicates the financial leverage of a company. The value indicates the percentage of total assets financed by creditors, debt and other liabilities (Averkamp, 2016). Essentially, a higher ratio for this value indicates a greater risk. According to the data provided, Northern Trust has up to 71 percent of its assets financed in this manner, indicating high risk for this investment. Caterpillar is also fairly risky compared to the other investment, as close to half of all the assets are also financed by creditors, debt or liabilities.

Debt to equity ratio also shows a company’s financial leverage by expounding the debt used by a company to finance its assets relative to the stockholder’s equity. A higher value means that a company is aggressively financing its assets on debt, indicating higher risk (Investopedia, 2016). From the analysis of debt/equity, the value show that Caterpillar is taking on very large amounts of debt to finance its assets, whereas Apple is taking the least debt. The other companies are taking on moderate debt to finance their assets.

The current assets to current liabilities is also known as the current ratio. It shows a company’s ability to pay back its liabilities using its assets. From this ratio, an investor can determine whether a company can pay back its obligations. Ideally, a ratio over 1 indicates the company’s ability to pay their obligations if they came due at that point. From the information above, Northern Trust lacks the ratio value while Consolidated Edison is below 1; these represent high risk investment. On the other hand, the other companies provide acceptable current ratio values, with Macy’s showing the strongest ability in this category.

The EBITDA-to-interest ratio seeks to evaluate a company’s financial durability by providing a picture of the company’s ability to repay its interest expenses for a year (Investopedia, 2015). A value of 1.0 shows the company’s ability to full settle the interest expense for that year. In this category, all companies are in the clear, with Apple taking a clear lead by six times the value of the second company, showing its financial durability.

Lastly, the debt-to-EBIDTA ratio measures a company’s financial leverage, where a company’s values shows how long (in years) a company would take to pay back its debts where debt and EBIDTA remain constant. A company that has more cash than debt will have a negative value; meaning the lower, the less risk that is associated. Macy’s and Apple take the lead in this category, with Consolidated Edison being fairly risky. Data is not available for Northern Trust, making it risky alongside Caterpillar.

Executive Summary 

From the above data, it is possible to determine the best two companies to invest in. these are Apple and Macy’s. On all checkpoints, Apple has green boxes meaning that it is an extremely risk averse investment. The highest possibility of sure returns lie in this investment. For Macy’s with the current trend, only the debt/equity ratio is questionable. Otherwise, this investment has risk averse characteristics in all the four other categories, making it good for investment.

Obtaining low risk tolerance investment is crucial for XYZ, as the company has a duty to its investors to make good on their investments in the company. Conclusively, therefore, it can be deduced from the data above that Apple and Macy’s are the best investment options which provide lowest risk. Consolidated Edison has moderate risk, whereas Caterpillar and Northern Trust have increasing risk respectively.

References

Averkamp, H. (2016). What is the debt to total assets ratio? Retrieved from Accounting Coach: https://www.accountingcoach.com/blog/ebt-to-total-assets-ratio 

Collier, P. M. (2015).  Accounting for managers: Interpreting accounting information for decision making . John Wiley & Sons. 

Investopedia. (2015). EBITDA-To-Interest Coverage Ratio . Retrieved from Investopedia: https://www.investopedia.com/terms/e/ebitdacoverinterestratio.asp 

Investopedia. (2016). Debt/Equity Ratio . Retrieved from Investopedia: https://www.investopedia.com/terms/d/debtequityratio.asp 

Warren, C. S., & Jones, J. (2018).  Corporate financial accounting . Cengage Learning.