Finance Research
Ratio Analysis
OBJECTIVE
You are to assume you have been recently hired by The Company and have been assigned to a team that reports to the CEO of THE COMPANY (SELECTED BY INSTRUCTOR). The head of your team is the CFO who is concerned about THE COMPANY’s current financial performance and comparison against major competitors in the industry and the impact that may have on the firm’s stock price. The CFO would like your team to provide insights that will help them to project future financial performance. Specifically, the primary question to answer is: will THE COMPANY be financially viable over the next two to three years, and which steps should be done to improve its financial stability?
THE COMPANY that is to be analyzed for this project is to be a company selected by instructor.
YOUR SPECIFIC ASSIGNMENT
Using the information from the websites the students will develop evaluation of the financial performance for THE COMPANY (SELECTED BY INSTRUCTOR). (The evaluation portion will total 85% of the assignment grade)
-1—Introduction (5% of the project grade)- The paper should begin with a short introduction, explains the purpose of the paper, and provides an overview of the contents that follow (one short paragraph).
-2— Ratio analysis. (60% of the project grade)
In this part of the project you will complete ratio analysis of THE COMPANY. Please remember that you are the financial analyst of THE COMPANY and should prepare the report to be read by the chairman (CEO) of THE COMPANY. The ratio analysis should be completed from the point of view of THE COMPANY’s the management.
Collect the following ratios for your COMPANY for the last 3 years. Present the ratios as the table(s) in your project. Create graphs for some ratios on your choice to show trends. If you use published ratios you must cite the source.
Liquidity (current ratio, quick ratio)
Operating performance ratio (Days of Sales in Inventory, Days of Sales Outstanding, Days of Payables Outstanding), Receivables Turnover, Inventory Turnover, Fixed Assets Turnover, Total Assets Turnover)
Profitability ratios (Gross Profit Margin, Operating Profit Margin, Net Profit Margin)
Debt/Equity and Financial Leverage ratios
Return on Investment ratios (ROA, ROE)
Liquidity ratios and Debt/Equity and Financial Leverage ratios are available on www.morningstar.com > type the stock symbol in the Search window to get into the company’s page. Click on Valuation and scroll down to Key Statistics > choose Financial Health tab.
Operating Performance ratios, Profitability ratios, and Return on Investment ratios are available on www.morningstar.com > type the stock symbol in the Search window to get into the company’s page. Click on Valuation and scroll down to Key Statistics > choose Operating and Efficiency tab.
Some ratios are also available in Operating Performance section.
Please note that you don’t need to sign up for any premiums or to pay for any information for the project.
b) Collect ROE, Net profit margin (listed as net margin), asset turnover, financial leverage, debt/equity ratios for the last year for the major competitor. Present the ratios as the table in your project.
c) Write 2-3 pages (or more) of analysis of the ratio results that you found. In your analysis you should answer the following questions:
How liquid is the company?
Analyze operating performance ratios. What important information does this analysis provide?
Is management generating a substantial profit on the company’s assets?
How is the company financing its assets? Discuss how much risk is associated with the financial structure the company.
Have the company’s ROA and ROE changed over the last three years? What was the main factor that influenced this change? To answer this question, apply DuPont analysis and three factors of the DuPont formula: Net profit margin, asset turnover, financial leverage. What ratio(s) has (have) been changed mostly over these three years and why?
Compare the ratios of you company to the peer competitor. If the management of the company would like to improve the company’s return on equity, what should the management of the company do?
-3- Develop a specific recommendation, with supporting rationale, as to whether the assigned company’s recent results in financial performance is of sufficient financial strength, will THE COMPANY be financially sustainable over the next two to three years, and which steps should be done to improve its financial stability? If the management of the company would like to improve the company’s financial performance, what should the management of THE COMPANY do? Your recommendations should be based on the results of your analysis in the project. (About 1 page) (15% of the project grade).
-4- Reflection – the student should write a paragraph in their own words reflecting on specifically what they learned from the assignment and how they think they could apply what they learned in the workplace. (5% of the project grade)
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