Objective: Familiarize students with the application of ratio and trend analysis.
This project allows you the opportunity to perform critical thinking, by addressing specific financial trends and industry comparisons for a company of your choice. This project will be a comparison/contrast paper that shows a demonstration of the application of financial analysis and critical thinking in a large organization. You will be performing trend analysis and industry comparisons on 3-4 years’ worth of financial statement data (whatever tells the story).
Trend Analysis & Ratio Analysis
Ratio analysis uses percentage or decimal calculations of comparison to at least two different sets of financial data. You are comparing how one relates (compares) to another. Decision makers use ratios because they illuminate relationships between financial data taken from the company’s statements.
Although ratio analysis can be used to evaluate financial performance, the number, by itself, does not reveal the entire story. To take the analysis to the next level, one must engage in trend analysis. Trend analysis utilizes the aforementioned ratios and shows the changes in those ratios, over time. Stakeholders can use trend analysis to not only compare “this year” to “last year” for this company, but can compare each year to the industry as a whole and even to the number one competitor for benchmarking purposes.
When you are setting up your paper, it would help to group your ratios and analysis together by content area (profitability, debt management, asset utilization, liquidity, and market value ratios).
Deliverables
Choose a publicly traded, publicly held, U.S. company. This means you need to pick a company that is public and has stock that trades on the exchange. You will use a variety of sites to find your financial data. Start with either Yahoo! Finance site or www.reuters.com. These two sites will allow you to capture at least one year of data for each of the two companies you are going to review as well as the industry ratios you will need. You will need to acquire annual reports for the company sites for years older than the most current year. You will need to review three – five years of financial information on this company, more years of data will produce a more thorough analysis.
Specific areas of analysis are noting major ratio categories and identifying whether the trend is up or down, whether that is good or bad, and why. Once the data are gathered, analyzed, and trends revealed; the student will acquire the same information for a competitor within the same industry. The same ratio and trend analysis will be gathered for the competitor. A comparison will ensue, identifying specific strengths and weaknesses of various components of the financial statements. Upon completion of the original company trend analysis and the competitor’s trend analysis, an analysis and trend comparison with the industry is required. This will allow the student to demonstrate an understanding of financial ratios and what trends are present between two different companies in one industry, as well as, being able to determine the position of the industry and be able to project future trends and how the company being evaluated can budget for changes in the industry.
Further analysis into the company reveals how the company manages cash, inventory, working capital, long-term debt, and other items in lieu of current market conditions.
So, what is required?
Part I
1. Your chosen company (financial ratios and trend analysis)
a. Using the data provided at the Yahoo! Finance site, use the ratios in the textbook or other sources, and determine the status of your chosen company based on those ratios. Compare performance year-to-year and whether trends appear to be favorable or unfavorable. Consider what the impact might be if those trends continue. The ratios you will be reviewing are the same ratios; as you will find in your textbook. Note that some of these ratios may not be applicable to your company. Some ratios are specific to certain types of firms. Not all firms carry significant accounts receivable as an example.
2. A competitor in the same industry (financial ratios and trend analysis)
a. Using the data provided at the site, use the ratios in the textbook and determine the status of your chosen competitor based on those ratios. Also, identify any trends you notice and what the impact might be if those trends continue.
3. The industry as a whole; how does your chosen company compare and what evaluations can you make (predict) for future financial success?
a. Review industry data and determine where these two companies fit within that industry. Are they leaders/followers? What does the future hold for this industry?
Part II
4. Discuss the company’s current management of working capital and current assets:
a. How does seasonality affect cash balances and inventory management?
b. Is the company managing and using its current assets well? Why, or why not?
c. What type of financing strategy does the company use?
d. How might free cash flow impact financing and investing decisions?
5. Using your chosen company and the current conditions in the financial markets, assume the firm needs to raise a large amount of cash. Compare the choices of raising these funds in the capital market (selling new shares of stock) versus the bond market (debt financing), and make a decision as to what is best and why. Also, consider ethical implications of financial reporting and how it relates to acquiring additional investors and accessing markets for additional capital. Consider the impact on the following on your choice:
a. The company’s existing capital structure
b. The company’s current market capitalization
c. The company’s weighted average cost of capital
d. The company’s degree of operating, financial and combined leverage
6. Take one of the following positions and justify your decision:
a. You are a banker who has been approached by this company to borrow a sum of money (you decide how much, and why). Based on the company’s financials and its future business prospects, would you loan the money? Why or why not.
b. You are an investor with a large sum of money (or a company looking for an investment), and buying either the company or shares of stock in the company is being considered. Determine, based on the company’s financials and its future business prospects, whether you will invest in this company or not.
There is no specific number of pages required to do this assignment, but past experience has shown it takes at least 5-7 pages of text to adequately complete EACH part of this assignment. This is a critical thinking assignment so all the specifics are not laid out in front of you. You must research, assess, analyze, and strategize about the company you have chosen, the competitors, and the industry as a whole.
