ACCT202 – Research Project
Overview
Financial ratio analysis is an important topic and is covered in your accounting textbooks as well as all mainstream corporate finance textbooks. It is also a popular agenda item in investment club meetings. It is widely used to summarize the information in a company's financial statements in assessing its financial health. In today's information technology world, real time financial data are readily available via the Internet. When performing financial ratio analysis you may use publications, such as Robert Morris Associates’ Annual Statement Studies, Dun & Bradstreet’s Key Business Ratios, Moody’s Manuals, Standard & Poor’s Corporation Records, Value Line Investment Survey, etc. However, you are encouraged to enhance your learning by accessing some of the on-line data bases such as Dow Jones Interactive and other data bases that might be found through our school library. This class assignment, in part, is designed for you to demonstrate how to assess a company's overall operations over time and its current financial standing in the industry.
Students will select an industry of interest and then select a company within that industry. Students will manually abstract the information from traditional printed sources or download the relevant financial data from the Internet and perform ratio analysis for the selected companies. Since successful financial ratio analysis is as much an art as it is a science, students must use common sense and sound judgment throughout the analysis. Another purpose of this assignment is to provide students with the opportunity to:
· Retrieve real time financial data via the Web;
· Analyze the financial performance of selected companies;
· Practice communication skills – through grammatically correct writing and professionally prepared reports
To evaluate how the selected company is performing over time, more than one year's financial ratios are required.
Trend analysis provides signals as to whether the company's financial health is likely to improve or deteriorate. Each student will perform the trend analysis based upon the following financial ratios:
· Leverage Ratios: to measure the extent to which the company's assets are financed with debt;
· Liquidity Ratios: to measure the company's ability to pay its bills;
· Profitability Ratios: to measure the company's ability to generate earnings;
· Efficiency Ratios: to measure the company's ability to utilize its assets;
· Market Value Ratios: to measure the market perception about the company's future prospects.
It is suggested that you use at least four years balance sheets, income statement, related statements and financial data to calculate the financial ratios and perform your analysis. You are required to obtain the earnings and interest expenses information from the income statements and calculate the ratio that measures the company's ability to service the debt. In the area of liquidity, current ratio and quick ratio are required to obtain quick assets (= cash & equivalent + receivables) from the balance sheets and operating expenditures from the income statements, and calculate this ratio to measure how long the company can keep up with its bills using only existing quick assets.
As the financial ratios in each of the five performance areas are compiled, they are analyzed across time. You might want to incorporate a table for your trend analysis similar to the one presented below.
CAUTION: If it is discovered that any group or individual plagiarized any apart of their research report. They will receive a grade of zero for the assignment and could face other academic sanctions as prescribed in the student handbook regarding cheating and academic dishonesty.
Table 1 - Sample Trend Analysis Table
Performance Area / 2007 / 2006 / 2005 / 2004 / TrendLeverage:
Debt % Tot Assets / 25.7 / 33.2 / 28.9 / 30.6 / Drop in leverage during 2007Interest Coverage / 269.7 / 395.8 / 318.4 / 195.4 / Lower coverage during 2007
Liquidity:
Current Ratio / 2.3 / 2.6 / 2.8 / 2.2 / Lower liquidity since 2005Quick Ratio / 1.0 / 1.3 / 1.6 / 1.3 / Lower liquidity since 2005
Interval Measure (days) / 63.8 / 90.8 / 115.3 / 86.4 / Lower liquidity since 2005
Profitability:
Profit Margin (%) / 23.1 / 27.7 / 24.7 / 22.0 / Lower profitability during 2007Return on Assets (%) / 19.3 / 24.0 / 21.7 / 20.4 / Lower ROA during 2007
Return on Equity (%) / 26.0 / 36.0 / 30.6 / 29.4 / Lower ROE during 2007
Efficiency:
Asset Turnover / .835 / .868 / .878 / .926 / Lower efficiency since 2004Receivables Turnover / 7.5 / 7.0 / 6.1 / 6.4 / Increased efficiency since 2006
Inventory Turnover / 5.7 / 5.2 / 4.4 / 4.1 / Increased efficiency since 2004
Market Value:
Price/Book Value / 8.41 / 5.92 / 6.37 / 3.83 / Good market perceptionsSince it is important to understand how the company's profitability, efficiency, and leverage are linked in its financial performance. Both the company's profitability (as measured in terms of profit margin) and efficiency (as measured in terms of asset turnover) determine its ROA. This ROA, along with the company's financial leverage contributes to its ROE. The changes in the company's ROE are to be noted and explained through its profit margin and asset turnover over time. The objective is to identify the company's strong area that can be capitalized upon and/or its weak area that must be improved upon. See Table 2 (below) for a sample profitability analysis table.
Table 2 - Sample Profitability Analysis Table
Net Income, $million
(from Income statements) / 6068 / 6945 / 5157 / 3566
Revenue, $million
(from Income statements) / 26273 / 25070 / 20847 / 16202
Assets, $million
(from balance sheets) / 31471 / 28880 / 23735 / 17504
Equity, $million
(from balance sheets) / 23377 / 19295 / 16872 / 12140
Profit Margin %
(Net Income/Revenue) / 23.1 / 27.7 / 24.70 / 22.0 / Drop in profitability during 2007
Asset Turnover
(Revenue/Assets) / .835 / .868 / .878 / .926 / Lower efficiency since 2004
Return on Assets %
(Profit Margin* Asset Turnover) / 19.3 / 24 / 21.7 / 20.4 / Drop in ROA during 2007
Equity Multiplier
(Assets/Equity) / 1.35 / 1.50 / 1.41 / 1.44 / Decrease in leverage during 2007
Return on Equity %
(ROA* Equity Multiplier) / 26.0 / 36.0 / 30.6 / 29.4 / Sharp decline in ROE during 2007
Industry Comparative Analysis
To explain the variation in the company's financial ratios over time, the industry comparative analysis must be performed along with the trend analysis. To evaluate the company's financial performance against its key competitors, a company-to- company comparison report should be prepared.
· The financial ratios in each of the performance areas are then analyzed across companies in the industry/group. You should compare your company's financial ratios with those of its key competitors and determine whether managerial or environmental factors cause the trend of the company's financial performance.
Students will report on how the company performs as compared to the industry norms and where the company stands relative to its competitors in the industry. The company's weak and/or strong areas of performance must be identified and recommendations for improvement presented. See Table 3 (below) for a sample industry comparative analysis for Intel.
A sample comparative analysis table is provided on the next page.
.
Table 3 - Intel Industry Comparative Analysis
Cookie Co. Inc / Other Cookie Co. Inc. / Packaged Cookies Industry / Evaluation
Leverage:
/ ExcellentDebt/Equity (%) / 3 / 73 / 19 / Low leverage
Interest Coverage / 269.7 / - / 20.8 / High coverage
Liquidity:
/ GoodCurrent Ratio / 3.2 / 1.7 / 2.8 / Above average liquidity
Profitability:
/ ExcellentProfit Margin (%) / 26.1 / -0.9 / 11.1 / High profitability
Return on Assets (%) / 19.3 / -2.4 / 7.2 / High ROA
Return on Equity (%) / 28.9 / - / 14.1 / High ROE
Efficiency:
/ GoodRevenue/Assets / .86 / .64 / .82 / Above average
Market Value:
/ GoodPrice/Book Value / 8.41 / 2.10 / 6.04 / High price to book
Price/Earnings / 36.3 / - / 67.3 / Below average PE
Dividend Yield (%) / 0.2 / 0.0 / 0.1 / Average
Case Brief and Presentation
Each student must submit a written report summarizing the ratio analyses of the companies in their industry. Students will produce a report that is concise and similar in style to an executive summary with no more than four typed pages plus exhibits. This must include your analyses, your recommendations, and the limitations of your analyses. Charts and tables are required in the presentation. Make sure to identify the reference materials and sources used in writing your report.
6