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Final project: Select one company. You may use the same company-(Answered)

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Final project:

Select one company. You may use the same company that you had for your first project or choose another company. Manufacturing or retail companies are a bit easier to handle than financial institutions.

1. Obtain the financial statements.

2. Obtain a copy of the appropriate Industry comparison page from the Almanac of Business and Industrial Financial Ratios (see below).

3. Prepare and comment on (one paragraph) one of the following: a) common sized balance sheet for 2 years, b) common sized income statement for 3 years, or c) pie and bar charts for the statement of cash flows (3 years; 9 total charts).

4. Compute the following ratios for the most current year only. Explain each answer in one sentence.

a. Current ratio

b. Quick ratio

c. Profit ratio

d. Gross profit ratio (if your firm has cost of goods sold)

e. Return on total assets

f. Total asset turnover

g. Average collection time

h. Average holding time for inventory

i. Average payment time

j. Operating cycle

k. Cash cycle

l. Debt to total assets ratio

5. Consider your answers in 4 above and the industry data from the Almanac, prepare a one or two paragraph analysis of the company and indicate whether, based on your analysis, you would invest in the company as part of a long term diversified investment for your retirement savings. Don?t tell me you need more information. I am not asking for a ?thorough? analysis, just specific items. So, make a recommendation, yes or no, based on your findings. It might be insightful to calculate the average collection time and average holding time for inventory for the industry from the almanac?s turnovers (items 35 and 36). Note that although many analysts prefer to talk about turnovers, it is much easier to discuss the days involved.


Tools for analyzing company financial statements

Access company financial information:

Company website: The company website can provide the annual financial statements. Look for ?investor relations? or similar items on the website. If the firm sells directly to consumers on the website, check the bottom of the page or try going through the ?About the company? section. The company financial statements may be included in the Annual Report, SEC Form 10-K, or other documents. Look for the full set of financial statements: Auditor?s Report, Management?s Report, Financial Statements, and Notes to Financial Statements. Beware of ?summary? or reviews of the financial data as these will often not contain the data you want.

SEC filings http://www.sec.gov ? Filings ? Company Filings Search. The annual report is in the Form 10-K. You can search by company name and then for specific forms. In the Form 10-K, you will find the full set of financial statements in ?ITEM 8,? but it is often put as an appendix at the end of the form. If you get to item 8 and it is only a few sentences, it will tell you where to look. If you access the interactive version of the Form 10-K, you can download the statements into an Excel file.

You can download the statements into an Excel file from a number of various financial sites. The university has a subscription to a database service called http://research.udmercy.edu ? Articles, Journals, + Databases ? Databases by subject: choose Business. ? Business Insight: Global (GALE). Search by company name. When you find your company, select ?Financials? from the list of options.

Beware: Sites that allow you to download the statements directly into Excel have often been ?massaged? by the site analysts. Since the statements may change in format or wording over the years, someone has facilitated the matching of data over the years. This generally means that the downloaded statement(s) will be much longer and harder to read than the ones you would view in the actual financial report. You gain some time in that someone else has entered the data into the Excel file for you, but you often loose the simplicity and formatting provided in the actual statement.

Beware: The Management Discussion and Analysis included ?with? the financial statements is not part of the audited financial statements. It will help clarify and explain things, but company management often includes forecasts and it is their chance to ?explain? why things occurred. Auditors do read it to ensure that it doesn?t contradict the financial statements/notes, but technically it isn?t audited. Likewise, use quarterly results and earnings reports (News) carefully.

Almanac of Business and Industrial Financial Ratios

Englewood Cliffs, N.J.: Prentice-Hall,

By Troy, Leo

Annual publication.

HF 5681.R25 T68.

Our library has the latest hardcopy in the Reference section (back wall to the far right when you enter the first floor) and has a CD rom version available (ask at the reference desk). It is easy to use the paper copy and you only need two pages from the book. You can easily take a picture with your phone to save the information you need.

Find the two pages (Table II, which includes company comparisons only if the companies had positive new income) for your company?s principal industry based on NAICS. If you don?t know the company six-digit NAICS, you can search your company name and NAICS on the web and find it quickly that way. Get a copy of the two pages for Table II, using the best match (same NAICS or closest) for the industry comparison.

Common size balance sheet

How to prepare it. Enter the two year?s balance sheet data onto a spreadsheet. For each year divide each item by that year?s total assets.

Comparing one company over time. This will show you what percentage of a firm?s assets are in the form of receivables, cash, inventory, various fixed assets, etc. You can also see what portion of those assets are financed with liabilities and with equity. You can see how these percentages change over time. Has the firm been investing more and more in fixed assets? Are inventories becoming a larger or smaller portion of the assets? Are accounts receivable and accounts payable changing in the same way as the inventories are changing?

Comparing to other firms in industry. The Troy Almanac will give you balance sheet and income statement percentages for companies in the same industry and of similar size. How does your firm compare to its peers?

Common size income statement

How to prepare it. Enter the three year?s income statement data onto a spreadsheet. For each year, divide each item by the total revenues.

Comparing one company over time. Have the gross profit ratios and the net profit ratios grown of shrunk? Have expenses been growing or shrinking in dollars and relative to the level of sales?

Comparing to other firms in the industry. How are the company?s expense ratios relative to their peers?

Analyzing the statement of cash flows

Preparing bar charts and pie charts. First determine the method your company used for cash flows from operating activities. Did they use the indirect method (most companies do, and it starts with the net income), or the direct method (this gives cash receipts from customers, payments, etc.)

Enter the net cash inflows from a) operating activities, b) investing activities, and c) financing activities, for each of the three years. Prepare a bar chart for each of the years ? three bars each. Is cash being used in operations or being generated by operations? By investing activities? By financing activities? How is this changing over the years?

Indirect method pie charts: Enter the statement of cash flows data into two separate lists: (1) cash inflows, and (2) cash outflows. Use only the ?Net cash inflow or outflow from operating activities?; do not include the detail from the operating section. Use the details of the investing and financing sections.

Direct method pie charts: Enter the statement of cash flows data into two separate lists: (1) cash inflows, and (2) cash outflows. You can safely use the details from the operating section: cash receipts from sales, cash paid for merchandise, etc., as well as the details from the investing and financing sections.

Use the Cash inflows data for the three years and prepare three pie charts showing where the sources of cash for the company. Then use the Cash outflows for the three years to see the uses of cash for the company.

Company life-cycle. Is this a new company? You would expect newer, younger companies to be raising cash from financing activities, and using cash for investing activities, and it may or may not yet be generating cash from operations. Growing companies frequently need infusions of cash from financing activities. Is the company well established and a cash cow? Are operations generating lots of cash, sufficient for investing needs, allowing repayment of loans and payments of dividends to the owners?

Short term financing, liquidity

  • Working capital: (net working capital, net current assets) the excess of current assets over current liabilities (p. 157).

  • Current ratio: working capital ratio) Current assets divided by current liabilities (p. 159).

  • Quick ratio: (net working capital, net current assets) the excess of current assets over current liabilities (p. 157).

Profitability

  • Profit ratio (net profit ratio) (return on sales ratio (profit margin ratio) Net income divided by sales (p. 166)

  • Operating margin. Operating income divided by sales. Note: operating expenses: A group of recurring expenses that pertain to the firm?s routine, ongoing operations (p. 164). Operating income: (operating profit, income from operations) Gross profit less all operating expenses (p. 164).

  • Gross profit ratio, if the firm reports Cost of sales or Cost of goods sold as a separate expense item. (Sales ? COGS) / Sales.

  • EBIT-to-sales: A variation of return on sales computed as earnings before interest and taxes divided by sales (p. 556).

Rates of Return

  • Return on total assets return on assets ratio (ROA) Net income divided by average total assets (p. 167).

  • Return on common equity return on common stockholders? equity ratio (ROE or ROCE) Net income divided by invested capital (measured by average common stockholders? equity) (p. 167).

  • Total asset turnover (sales to total assets): A ratio that measures the sales a company is able to generate for each dollar invested in assets. Computed as: Sales divided by average total assets (p. 556).

Operating ratios, turnovers, and cycles

  • Accounts receivable turnover Credit sales divided by average accounts receivable for the period during which the sales are made (p. 256) Note: External analysis usually uses total sales because credit sales is generally not available. For the denominator, add last year and this year?s accounts receivable and divide by 2.

  • Average collection time: 365 days divided by the accounts receivable turnover.

  • Inventory turnover: The cost of goods sold divided by the average inventory held during a given period (p. 305). For the denominator, add last year and this year?s inventory and divide by 2.

  • Average inventory holding time: 365 days divided by the inventory turnover.

  • Accounts payable turnover [Cost of goods sold + increase (or ? decrease) in Inventory] / average accounts payable for the period during which the sales are made. For the denominator, add last year and this year?s accounts payable and divide by 2.

  • Average payment period: 365 days divided by the accounts payable turnover.

  • Operating cycle: How long does it take from the time a firm buys inventory until it receives cash from the sale? Average inventory holding time PLUs average collection time.

  • Cash cycle: How long must a company ?front? the cash for its inventories before it receives the cash back from its customers? Average inventory holding time PLUS average collection time MINUS average payment period.

Long term solvency, financial leverage

  • Debt to equity ratio Total liabilities divided by total shareholders? equity (p. 420).

  • Debt-to-total-assets ratio Total liabilities divided by total assets (p. 420t

  • Times interest earned: A ratio that measures the sales a company is able to generate for each dollar invested in assets. Computed as: Sales divided by average total assets (p. 556).

  • Free cash flow: Generally defined as net cash flow from operations less capital expenditures (p. 211).


Final project:

 

Select one company. You may use the same company that you had for your first project or choose

 

another company. Manufacturing or retail companies are a bit easier to handle than financial

 

institutions.

 

1.

 

Obtain the financial statements.

 

2.

 

Obtain a copy of the appropriate Industry comparison page from the Almanac of Business and

 

Industrial Financial Ratios (see below).

 

3.

 

Prepare and comment on (one paragraph) one of the following: a) common sized balance sheet

 

for 2 years, b) common sized income statement for 3 years, or c) pie and bar charts for the statement of

 

cash flows (3 years; 9 total charts).

 

4.

 

Compute the following ratios for the most current year only. Explain each answer in one

 

sentence.

 

a.

 

Current ratio

 

b.

 

Quick ratio

 

c.

 

Profit ratio

 

d.

 

Gross profit ratio (if your firm has cost of goods sold)

 

e.

 

Return on total assets

 

f.

 

Total asset turnover

 

g.

 

Average collection time

 

h.

 

Average holding time for inventory

 

i.

 

Average payment time

 

j.

 

Operating cycle

 

k.

 

Cash cycle

 

l.

 

Debt to total assets ratio

 

5.

 

Consider your answers in 4 above and the industry data from the Almanac, prepare a one or two

 

paragraph analysis of the company and indicate whether, based on your analysis, you would invest in the

 

company as part of a long term diversified investment for your retirement savings. Don?t tell me you

 

need more information. I am not asking for a ?thorough? analysis, just specific items. So, make a

 

recommendation, yes or no, based on your findings. It might be insightful to calculate the average

 

collection time and average holding time for inventory for the industry from the almanac?s turnovers

 

(items 35 and 36). Note that although many analysts prefer to talk about turnovers, it is much easier to

 

discuss the days involved.

 


 

Tools for analyzing company financial statements

 

Access company financial information:

 

Company website: The company website can provide the annual financial statements. Look for ?investor

 

relations? or similar items on the website. If the firm sells directly to consumers on the website, check

 

the bottom of the page or try going through the ?About the company? section. The company financial

 

statements may be included in the Annual Report, SEC Form 10-K, or other documents. Look for the full

 

set of financial statements: Auditor?s Report, Management?s Report, Financial Statements, and Notes to

 

Financial Statements. Beware of ?summary? or reviews of the financial data as these will often not

 

contain the data you want.

 

SEC filings http://www.sec.gov Filings Company Filings Search. The annual report is in the Form 10-K.

 

You can search by company name and then for specific forms. In the Form 10-K, you will find the full set

 

of financial statements in ?ITEM 8,? but it is often put as an appendix at the end of the form. If you get to

 

item 8 and it is only a few sentences, it will tell you where to look. If you access the interactive version of

 

the Form 10-K, you can download the statements into an Excel file.

 

You can download the statements into an Excel file from a number of various financial sites. The

 

university has a subscription to a database service called http://research.udmercy.edu Articles,

 

Journals, + Databases Databases by subject: choose Business. Business Insight: Global (GALE). Search

 

by company name. When you find your company, select ?Financials? from the list of options.

 

Beware: Sites that allow you to download the statements directly into Excel have often been ?massaged?

 

by the site analysts. Since the statements may change in format or wording over the years, someone has

 

facilitated the matching of data over the years. This generally means that the downloaded statement(s)

 

will be much longer and harder to read than the ones you would view in the actual financial report. You

 

gain some time in that someone else has entered the data into the Excel file for you, but you often loose

 

the simplicity and formatting provided in the actual statement.

 

Beware: The Management Discussion and Analysis included ?with? the financial statements is not part of

 

the audited financial statements. It will help clarify and explain things, but company management often

 

includes forecasts and it is their chance to ?explain? why things occurred. Auditors do read it to ensure

 

that it doesn?t contradict the financial statements/notes, but technically it isn?t audited. Likewise, use

 

quarterly results and earnings reports (News) carefully.

 

Almanac of Business and Industrial Financial Ratios

 

Englewood Cliffs, N.J.: Prentice-Hall,

 

By Troy, Leo

 

Annual publication.

 

HF 5681.R25 T68.

 

Our library has the latest hardcopy in the Reference section (back wall to the far right when you enter

 

the first floor) and has a CD rom version available (ask at the reference desk). It is easy to use the paper

 

copy and you only need two pages from the book. You can easily take a picture with your phone to save

 

the information you need.

 


 

Find the two pages (Table II, which includes company comparisons only if the companies had positive

 

new income) for your company?s principal industry based on NAICS. If you don?t know the company sixdigit NAICS, you can search your company name and NAICS on the web and find it quickly that way. Get a

 

copy of the two pages for Table II, using the best match (same NAICS or closest) for the industry

 

comparison.

 

Common size balance sheet

 

How to prepare it. Enter the two year?s balance sheet data onto a spreadsheet. For each year divide each

 

item by that year?s total assets.

 

Comparing one company over time. This will show you what percentage of a firm?s assets are in the form

 

of receivables, cash, inventory, various fixed assets, etc. You can also see what portion of those assets are

 

financed with liabilities and with equity. You can see how these percentages change over time. Has the

 

firm been investing more and more in fixed assets? Are inventories becoming a larger or smaller portion

 

of the assets? Are accounts receivable and accounts payable changing in the same way as the inventories

 

are changing?

 

Comparing to other firms in industry. The Troy Almanac will give you balance sheet and income

 

statement percentages for companies in the same industry and of similar size. How does your firm

 

compare to its peers?

 

Common size income statement

 

How to prepare it. Enter the three year?s income statement data onto a spreadsheet. For each year,

 

divide each item by the total revenues.

 

Comparing one company over time. Have the gross profit ratios and the net profit ratios grown of

 

shrunk? Have expenses been growing or shrinking in dollars and relative to the level of sales?

 

Comparing to other firms in the industry. How are the company?s expense ratios relative to their peers?

 

Analyzing the statement of cash flows

 

Preparing bar charts and pie charts. First determine the method your company used for cash flows from

 

operating activities. Did they use the indirect method (most companies do, and it starts with the net

 

income), or the direct method (this gives cash receipts from customers, payments, etc.)

 

Enter the net cash inflows from a) operating activities, b) investing activities, and c) financing activities,

 

for each of the three years. Prepare a bar chart for each of the years ? three bars each. Is cash being

 

used in operations or being generated by operations? By investing activities? By financing activities? How

 

is this changing over the years?

 

Indirect method pie charts: Enter the statement of cash flows data into two separate lists: (1) cash

 

inflows, and (2) cash outflows. Use only the ?Net cash inflow or outflow from operating activities?; do

 

not include the detail from the operating section. Use the details of the investing and financing sections.

 


 

Direct method pie charts: Enter the statement of cash flows data into two separate lists: (1) cash inflows,

 

and (2) cash outflows. You can safely use the details from the operating section: cash receipts from sales,

 

cash paid for merchandise, etc., as well as the details from the investing and financing sections.

 

Use the Cash inflows data for the three years and prepare three pie charts showing where the sources of

 

cash for the company. Then use the Cash outflows for the three years to see the uses of cash for the

 

company.

 

Company life-cycle. Is this a new company? You would expect newer, younger companies to be raising

 

cash from financing activities, and using cash for investing activities, and it may or may not yet be

 

generating cash from operations. Growing companies frequently need infusions of cash from financing

 

activities. Is the company well established and a cash cow? Are operations generating lots of cash,

 

sufficient for investing needs, allowing repayment of loans and payments of dividends to the owners?

 

Short term financing, liquidity

 


 


 

Working capital: (net working capital, net current assets) the excess of current assets over

 

current liabilities (p. 157).

 


 


 


 

Current ratio: working capital ratio) Current assets divided by current liabilities (p. 159).

 


 


 


 

Quick ratio: (net working capital, net current assets) the excess of current assets over current

 

liabilities (p. 157).

 


 

Profitability

 


 


 

Profit ratio (net profit ratio) (return on sales ratio (profit margin ratio) Net income divided by

 

sales (p. 166)

 


 


 


 

Operating margin. Operating income divided by sales. Note: operating expenses: A group of

 

recurring expenses that pertain to the firm?s routine, ongoing operations (p. 164). Operating

 

income: (operating profit, income from operations) Gross profit less all operating expenses (p.

 

164).

 


 


 


 

Gross profit ratio, if the firm reports Cost of sales or Cost of goods sold as a separate expense

 

item. (Sales ? COGS) / Sales.

 


 


 


 

EBIT-to-sales: A variation of return on sales computed as earnings before interest and taxes

 

divided by sales (p. 556).

 


 

Rates of Return

 


 


 


 

Return on total assets return on assets ratio (ROA) Net income divided by average total assets (p.

 

167).

 


 


 


 

Return on common equity return on common stockholders? equity ratio (ROE or ROCE) Net

 

income divided by invested capital (measured by average common stockholders? equity) (p. 167).

 


 


 


 

Total asset turnover (sales to total assets): A ratio that measures the sales a company is able to

 

generate for each dollar invested in assets. Computed as: Sales divided by average total assets

 

(p. 556).

 


 

Operating ratios, turnovers, and cycles

 


 


 

Accounts receivable turnover Credit sales divided by average accounts receivable for the period

 

during which the sales are made (p. 256) Note: External analysis usually uses total sales because

 

credit sales is generally not available. For the denominator, add last year and this year?s accounts

 

receivable and divide by 2.

 


 


 


 

Average collection time: 365 days divided by the accounts receivable turnover.

 


 


 


 

Inventory turnover: The cost of goods sold divided by the average inventory held during a given

 

period (p. 305). For the denominator, add last year and this year?s inventory and divide by 2.

 


 


 


 

Average inventory holding time: 365 days divided by the inventory turnover.

 


 


 


 

Accounts payable turnover [Cost of goods sold + increase (or ? decrease) in Inventory] / average

 

accounts payable for the period during which the sales are made. For the denominator, add last

 

year and this year?s accounts payable and divide by 2.

 


 


 


 

Average payment period: 365 days divided by the accounts payable turnover.

 


 


 


 

Operating cycle: How long does it take from the time a firm buys inventory until it receives cash

 

from the sale? Average inventory holding time PLUs average collection time.

 


 


 


 

Cash cycle: How long must a company ?front? the cash for its inventories before it receives the

 

cash back from its customers? Average inventory holding time PLUS average collection time

 

MINUS average payment period.

 


 

Long term solvency, financial leverage

 


 


 

Debt to equity ratio Total liabilities divided by total shareholders? equity (p. 420).

 


 


 


 

Debt-to-total-assets ratio Total liabilities divided by total assets (p. 420t

 


 


 


 

Times interest earned: A ratio that measures the sales a company is able to generate for each

 

dollar invested in assets. Computed as: Sales divided by average total assets (p. 556).

 


 


 


 

Free cash flow: Generally defined as net cash flow from operations less capital expenditures (p.

 

211).

 


 

 

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