Due Date: Beginning of Class, Tuesday, October 4

ECO 330b

Homework #1

Due Date: Beginning of class, Tuesday, October 4.

The goals of this assignment are:

To introduce you to the use of ratios in business analysis
To give you practical experience in applying ratio analysis and benchmarking
To try to be sure that you have looked at these ratios before the first exam.

Your task will be to compare the financial ratios of the company I assign to you with those of another company you select as an appropriate benchmark for the company. Descriptions and definitions of all of the ratios are in CHAPTER 4 of your text.

The company I assign to you depends on the last digit of your student ID number. (Therefore there will be 10 different assignments within the class.) You should look up your company on any website that provides comprehensive information on publicly-listed companies. There are many of these: I would recommend or or you may use any other. (Yes, many of the ratios are found directly on the web site, so you can check your own work to be sure it’s correct. And there will probably be some discrepancies between what they report as a ratio and what you calculate directly.)

For each ratio, I want you to provide both the numerator and denominator as well as the ratio value. For instance, if your company was donut-maker Dunkin Donuts (DNKN) and you need to report the current ratio (current assets/current liabilities) you need to tell me NOT JUST the number 1.33 (found on the “key ratios” tab) but 558 (Current Assets) / 419 (Current Liabilities) = 1.33. You should use the most recent ANNUAL Balance sheet (not the quarterly ones.)

If your student ID ends in:then your company is:

0 or 1WUWestern Union

2 or 3UPS United Parcel Service

4 or 5SMPStandard Motor Products

6 or 7RLIRLI Corporation

8 or 9PFE Pfizer Corporation

Got it?

Part I: So for your company, give me:

Current Ratio
Quick (acid test) Ratio:
Inventory Turnover Ratio:
Days Sales Outstanding:
Fixed Assets Turnover Ratio:
Total Assets Turnover Ratio:
Debt Ratio:
Times-Interest-Earned Ratio:
Operating Margin:
Profit Margin:
Return on Total Assets:
Basic Earning Power:
Return on Common Equity:
Price/Earnings Ratio:
Market/Book Ratio:

Part II: To understand how well a company is doing, it helps to say “compared to what?” Different industries have different turnover of inventory, different amounts of fixed capital, etc. Therefore, it makes most sense to compare the company’s ratios to that of another similar company.

Select a benchmark company for your company. (On the website with the stock information on your company, you can easily find out which companies are considered industry competitors.) Write out why you believe the company you selected is the best comparison. For instance, if your company is Dunkin Donuts, you might pick Krispy Kreme because both are in the restaurant industry, but also both in the fast-food segment, and both specialize in donuts designed to produce obesity and heart attacks. Therefore Krispy Kreme is a better comparison for Dunkin Donuts than Whole Foods or Starbucks, or Microsoft for that matter. (This is a matter of judgment – are all kinds of banks the same, or insurance, or consumer goods?)
Re-calculate the ratios from Part I for your comparison company. For each, determine whether “your” company is better or worse than the benchmark.
Finally, your overall judgment. Given everything – would you invest your money in “your” company or the benchmark company? Why?

Part III: Extra Credit (one point). Guess—where did I get the list of companies to give to you to investigate?