NATIONSTAR MORTGAGE HOLDINGS INC AND OCWEN FINANCIAL 9
NationstarMortgage Holdings Inc and Ocwen Financial
NationstarMortgage Holdings Inc and Ocwen Financial
Financialanalysis is a tool applied by interested parties to evaluate theperformance of an organization for a given accounting period.Financial statements are the summaries of the transactions and hencethey are not easily translated to assist various stakeholders inmaking better decisions. In this case, financial ratios and analysisare used in evaluating two companies to determine the one that has astrong quality of earnings. Ratios in three categories such asprofitability, and leverage, as well as, the analysis between thecash flow balances and the income and revenue are provided toevaluate the quality of earnings (Fridson,Alvarez & FinancePro, 2011 Riahi-Belkaoui, 1998). Theratios put into consideration include returnon assets, return on equity, earnings per share, price earning ratio,total liability to total asset ratio and long term debt to totalasset ratio are analysis for two companies Nationstar MortgageHoldings Inc and Ocwen Financial Corporation for 3 years, 2011, 2012,and 2013.
Returnon assets and return on equity are profitable ratios used todetermine whether an organization raises adequate revenue fromcommitted investment and assets utilized. The high of these ratios ispreferred. For the three consecutive years, Nationstar MortgageHoldings Inc has a return on equity ratio of 7%, 27% and 22%respectively, while the return on assets was 1%, 3 % and 2% (refer toappendix 1). Ocwen Financial Corporation’s return on equity ratiofor the three years was 6%, 11% and 16 % respectively, while thereturn on assets was 2%, 3 % and 4 %. Nationstar Mortgage HoldingsInc has a stronger return on equity for the three years, but itsreturn on assets is weaker than Ocwen Financial Corporation hasreported. Importantly, Ocwen Financial Corporation seems to be headedto a stronger direction because of the consistency in growth of thetwo ratios.
Earningsper share and price earning ratio are also profitability ratios andshows how the shares of an organization are fairing in the market.The high of these ratios is preferred because it indicates that theshareholders wealth is growing and that their value appreciates (Shim& Siegel, 2007 Maynard, 2013).Nationstar Mortgage Holdings Inc’s Earnings per share in 2011,2012, and 2013 was 0.23, 2.27 and 2.4 respectively, while the priceearning ratio was 15.6, which implies that investors were willing topay 15.4 times more of the average earning per share. Ocwen FinancialCorporation’s Earnings per share for the three years was 0.58, 1.34and 2.18 respective, while the price earning ratio for the year 2013was 10.1. Nationstar Mortgage Holdings is currently having strongerearning per share and price earning ratio compared to Ocwen FinancialCorporation, and hence its shareholders are gaining more returns andtheir shares are gaining value at a higher rate.
Totalliability to total asset ratio and total long term liability to totalassets are leverage ratios used to show the proportion of externaland internal sources of capital used in an organization (Peterson& Fabozzi, 2012).A total debt to asset ratio of less the 1 is preferred because itindicated that the company can pay all its total debt using theassets it owns. For the three years 2011, 2012, and 2013, the totaldebt to asset ratio was 0.84, 0.89 and 0.93 respective. The totallong term debt to total assets for the three years was 24%, 29 % and33% respectively. This is negative trend because the ratio is headingto the unhealthy direction. A low of this ratio is preferred andhence the 24%, 29 % and 33 % of the total long term liability to debtratio for the three years is an indication of a strong capitalstructure. The total debt to equity ratio to Ocwen FinancialCorporation was 0.82, 1.12 and 0.76 respectively, while total longterm liabilities to total assets was to total debt was 12%, 0 % and16 % respectively. This implies that Ocwen Financial Corporation is abetter financial leverage compared to Nationstar Mortgage Holdings.
AssessingQuality of Earnings
Theassessment in this case involved the evaluation of how anorganization is able to generate earning out of the cash flow itemsin an organization (Keown,2004).The cash spent from operating activities to income and revenue ratioare applied to determine the quality of earnings. Ocwen FinancialCorporation has shown strength in all the three ratios applied in theassessment of the quality of earnings. Its Netcash used in operating activities to revenue amount was 0.48, 2.26,and 2.14 respectively. While its Netcash used in operating activities to income, for the same period was2.9, 10.04 and 12.54 respectively. On the other hand, Nationstar Mortgage Holdings Inc’s Netcash used in operating activities to revenue amount was 0.88, 1.99,and 0.08 respectively. Thisimplies that Ocwen Financial Corporation can raise more revenue andprofits out of the cash spent under various categories of the cashflow. It would be therefore be acceptable to conclude that thecompany has better prospect for investment compared to NationstarMortgage Holdings Inc.
AccountingPolicies and Estimates
Anumber of accounting policies are applied by the two companies asprovided in their reports. According to Nationstar Mortgage HoldingsInc, there are estimates in the preparation of the consolidatedfinancial statement which can make some results to be different fromthe actual figures due to factors such as changes in interest ratesand price level. Secondly, certain amounts have been reclassified tofits within the requirement of the current report period. Cash andcash equivalent reported in the balance sheet include theunrestricted cash on hand. On the other hand, Ocwen FinancialCorporation states that is applies policies such as fair valuemeasurements, sale of mortgage loans, accounting for mortgage forinvestment, nonrecourse debt and valuation of deferred tax assets.All these principles are based on GAAP particularly when it comes toconsolidation of financial reports.
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