Financial Analysis

You have just started an internship at Workshire Bathaway (or “WB”), a large and very successful conglomerate in New York. You cannot believe your good fortune at working and learning at such a prestigious firm, and in fact have the opportunity to work directly with its President and CEO Ms. Wren Baker.
In order to assess your understanding of financial reporting and financial analysis Ms. Baker has tasked you with identifying a company that WB may want to purchase. Given the almost unlimited resources of WB it does not matter how big the potential target is, what industry it is in, whether it is public or private, where it is located globally, etc.
Seeing the perplexed look on your face, Ms. Baker has provided some more specific instructions below. To make an investment recommendation Ms. Baker asks that you select two similar companies for analysis, use data from public sources, prepare an extensive financial analysis, then communicate the results of your analysis in a detailed written report, and highlight the results in a short presentation. The goal is to provide an investment recommendation to Ms. Baker. Ms. Baker notes that this project will build your critical thinking, software usage, and communication skills.

Part 1:
A written report that includes the following:
A. Company profile: An overview of the companies that includes a description of the business operations, the industry in which they operate, their products, their markets, and competitors. This is very important to provide Ms. Baker with an understanding of the potential business purchase.
B. Company news: summarize at least 1 major event that have affected each company or their industry over the past two years.
C. Financial statement analysis: prepare and analyze condensed, trend and common size financial statements for each company.
D. Ratio analysis: prepare a comprehensive analysis of financial ratios for the companies focused on its profitability, efficiency, liquidity, and solvency. Where applicable compare to industry or competitor information and norms.
E. Research summary: Answer the following question in written form: Which of these two companies do you recommend WB to purchase? Prepare a written summary of your analysis and supported investment recommendation.

Part 2:
Which of these two companies do you recommend WB to purchase? Prepare an audio presentation (5 minutes or less) highlighting information from your written report that supports your investment recommendation.You need to record your presentation (audio only)

Key deliverables and timelines
Step 1:
You must select a pair of two companies for this project. For example, you can choose Pair #2 which includes PRB and PTR. However, it is not allowed to mix and match, i.e. choosing BTI and SNE are not allowed. You are encouraged to research potential companies before identifying company or companies they would like to analyze for this project.

Pair Company A Company B
1 America Movil AMX Vodafone Group VOD
2 Petroleo Brasileiro S.A. PBR PetroChina Co. Limited PTR
3 Sony SNE Koninklijke Philips N.V. PHG
4 Toyota Motor Corp TM Tata Motors TTM
5 British American Tobacco BTI Altria Group, Inc. MO
6 Banco Santander, S.A. SAN PNC Financial Services Group PNC
7 BHP Group BHP Rio Tinto RIO
8 ABB Ltd ABB General Electric Company GE
9 Ball Corp BLL Amcor AMCR
10 Diageo Plc DEO Constellation Brands STZ
11 Union Pacific Corp UNP Canadian National Railway CNI
12 Johnson & Johnson JNJ Novartis AG NVS
13 Capri Holdings CPRI V.F. Corp VFC

Step 2:
You are strongly urged to use spreadsheet software for purposes of the financial statement and ratio analysis (the quantitative items described in C and D above).

Detailed instructions (with suggested length):
A. Company profile (2 pages):
a. Review the corporate website of each company, which often provides general and investor relations information. Recognize that this information may be biased in favour of the company.
b. Review the annual reports (financial statements and management discussion and analysis), interim filings, and prospectuses, material change reports, and information circulars (as available).
Summarize your research in a 1 – 3-page written report on your companies –industry, products, and markets. This should be a professionally written paper with introductory and concluding paragraphs. Appropriately cite all sources.

B. Company news (1 page):
a. For each of your company, identify and summarize at least 1 major event that have affected the company or its industry over the two years. Discuss how this event is expected to impact the company’s operations and financial performance and ratios. Consider factors such as commodity prices, exchange rates, regulatory changes, acquisitions, changes in competitive landscape, changes in government regulation or consumer trends, etc.
b. It is important to not rely entirely on the company to identify these news items. In fact, you are unlikely to find this in any of the company’s reporting.
c. Ensure the items are legitimate ‘news’ – dividend announcements, analysts’ share price expectations, management conference call, company outlook announcements, etc. – these items are not news. Appropriately cite all sources.

C. Financial statement analysis (3 pages of quantitative analysis and 2 pages of written discussion):
a. For each of your company, collect at least three most recent years of financial statements which will provide at least 4 years of financial information.
b. Prepare condensed statements of financial position, statements of income and comprehensive income, and statements of cash flow. Use of spreadsheet software is strongly recommended.
c. Prepare trend analysis and common sized financial statements from the condensed statements.
d. Review the condensed, trend and common sized statement of financial position. For each of your company, comment on trends in the growth of assets, liabilities, shareholders’ equity and overall financial risk. Where available, compare the two companies.
e. Review the condensed, trend and common sized statement of income. For each of your company, comment on trends in revenue, expenses, income, and overall profitability. Where available, compare the two companies.
f. Review the condensed, trend and common sized statement of cash flows. For each of your company, comment on trends in the operating, investing and financing cash flows, and overall cash position. Where available, compare the two companies.
g. Write a summary of the overall financial ‘story’ reflected in the financial statements based on your analysis.

D. Ratio analysis (3 pages of quantitative analysis plus 2-page written report)
a. For each of your company, prepare an extensive multi-year ratio analysis based on the financial statement analysis. Use of spreadsheet software is strongly recommended. Do not use every possible ratio analysis. Rather, identify the ratios that are most important to the company.
b. For each calculated ratio, comment on whether the ratio is stronger or weaker, quicker or slower, more liquid or less liquid, more risks or less risky.
c. Where available, compare the financial ratios of the two companies.
d. Prepare written report discussing:
i. What the ratio analysis reveals about the companies – financial strength, profitability, risk, etc.
ii. The companies’ profitability, efficiency, liquidity, and solvency and noting whether these measures are improving or deteriorating, and the implications for a potential investor. What does this analysis suggest about future performance of the firms?
e. Discuss the impact of accounting rules on your financial ratios if applicable. You are not required to calculate the adjustment from one accounting rule to another. But, you need to discuss what kind of bias the differences in accounting rules may create for your financial ratios, if any.

E. Research summary (2 pages)
a. This written document should summarize your research in a clear and concise manner. b. As part of this document:
i. Indicate whether the overall profitability, efficiency, liquidity, and solvency of the companies are strong, average or weak. Comment on risks associated with the companies. Support your conclusions.
ii. Summarize current events and other items of importance. iii. Make a supported recommendation to Ms. Baker: indicate which of the two companies WB should invest in. Please include three to five significant points to justify your conclusion.

Presentation (audio only, up to 5 minutes): Please put in writing what must be said for the audio presentation on a separate word document
Which of these two companies do you recommend WB to purchase? Prepare an audio presentation that summarizes your research and analysis of the companies. No presentation slides are required. Use your research summary to organize your presentation.
Be convincing – should Ms. Baker invest in company A or company B? Does your research support your recommendation?
Focus on key financial information and ratios.
Focus on highlights of your research, not a broad summary.
Make it interesting, concise, and clear. And naturally Ms. Baker expects it to be professional.

Term Project Submission:
Your submission should include two files: a PDF file and an audio file. Prepare your PDF file with the following sections, in the order indicated:

  1. Title page
  2. Research summary (part E)
  3. Tell me about the company (part A)
  4. Company news (part B)
  5. Financial statement analysis (part C)
  6. Ratio analysis (part D)
  7. Sources
  8. Appendices (spreadsheet tables):
    a. Financial statement analysis: condensed and common sized financial statements b. Ratio analysis

Section Weights (%)
A. Research summary 10
B. Tell me about the company 10
C. Financial statement analysis and discussion 25
D. Ratio analysis and discussion 25
Sources 2
Professional quality – coverage, presentation, grammar 3
Presentation 25
Total 100

Sample Solution