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Financial ratio analysis aimed at determining a business’s financial strength and condition. The Current and Quick Ratios are commonly used to evaluate a company’s ability to pay it’s short term obligations.

While RIM’s current and quick ratios seem low on first glance, it’s important to consider the business as a going concern.  RIM had a higher than the current year’s industry average in 2007 because it’s current liabilities grew from almost half the current industry average to 3.35 times the industry average current liabilities. This increase can be explained by the release of the BlackBerry Storm, which was released November 4^th, 2008.

RIM’s debt-to-equity ratio has steadily decreased in the past three years. They’ve been able to do this because of an increase in their gross revenue of 4.47 times since 2006 while being able to keep their total revenue in line with their cost of goods sold which gives them extra cash to pay down debt. It may have been in their best interest to use that cash for other purposes.

Efficiency Ratios measure how effectively a company utilizes it’s assets and liabilities. RIM has much higher than expected inventory turnover numbers compared to the industry average, but as smart phones become more of a commodity and prices become lower they are able to bring the ratio down.

RIM’s asset turnover rate is well above the industry average in 2009. This shows that they are able to use their assets more effectively than the average to generate revenue. Their asset turnover could have raised in the past three years because they are moving from a high-margin to lower-margin pricing strategy.

Profitability Ratios assess a business’s ability to generate revenue as opposed to it’s expenses and other costs. RIM’s profit margins are fairly constant over the past few years which investors appreciate. RIM’s 2009 earnings are lower than 2008 probably because of it’s increase phone line in the consumer market which it paid for in 2009.

Management Effectiveness Ratios compare a company’s finances to evaluate the business’s effectiveness.  RIM’s return on assets and return on equity show that the company can make much more money on their assets and equity than the industry average. Management obviously knows how to monetize their products that is much greater than their competition.

They have a fairly large average collection period. Their ACP could be large due to the fact that an standard is net due 30, but mobile phone carriers normally have to hold inventory, then after they sell their inventory they must wait another period until they make money on the subsidized costs of the device. One way carriers could mitigate this cost is to pay handset manufacturers over a period of time. Comparing these numbers to the industry average would show if RIM has a problem with their collection period.

NOTE: Financial ratios calculated by Jennifer Bonoff and Seth Gagnon (in alphabetic order). Analysis written by Ramon Ecung II.

NOTE 2: I’m not a stock analyst, and don’t own a position in RIM. Please take my opinions with a grain of salt.