Financial managers are, arguably, vital to the survival of any corporation. They generally have a say on decisions that directly impact the performance and value of businesses. These decisions are, invariably, related to which projects to pursue (capital budgeting), how to raise funds (capital structure), and how to safeguard the business’ daily operations (working capital management).
In this context, knowing how to interpret financial statements has the same importance to a manager as the ability to understand medical results has to a physician. One of the most important tools in this regard is the financial ratio analysis, whereby information is combined in a way that portrays the status of the company in terms of important aspects (e.g., liquidity, profitability, efficiency, etc.).
The purpose of this assignment is to provide you the opportunity to retrieve the real time financial data from websites of available databases, analyse the financial health of the selected company using Financial ratio analysis, Trend analysis, DuPont Analysis and peer comparative analysis.
Financial ratio analysis
The report will focus on how the company performs as compared to its competitors in the industry. The company’s weak and/or strong areas of performance must be identified and recommendations for improvement should be presented.
To get a good grasp of financial ratio analysis, this assignment asks you to identify a listed company AND its major competitor firm whose financial ratios are either readily available (i.e., through IBISWorld or Marketline or any other database) or, else, can be calculated through its financial statements. Obtain (or calculate if not available) the following financial ratios for the selected company from the most recent 3 years: (So, first thing; choose a firm and its competitor and get the following financial ratios, or calculate them, from the last 3 years)
1. Liquidity Ratios – Current ratio, quick ratio
2. Capital structure ratios – Debt ratio, interest coverage ratio
3. Efficiency ratios – Total asset turnover ratio, fixed asset turnover ratio
4. Profitability ratios – gross profit margin, net profit margin
Then, upon collecting observations, conduct the following analyses: Answer the following 5 questions using clear subtitles and explain: (Also, use graphs to visualise your explanation)
1. Peer-firm comparison & Trend analysis: Based on the three-year data, compare and elaborate on how the company AND the competitor were performing in terms of their capital structure, efficiency, profitability and liquidity ratios. Compare and discuss the potential reasons (firm-specific, industry-specific, or economic reasons) behind their recent trends. Also, what are the current strength/weakness of your chosen company if compared with the competitor? Why? Highlight any areas (and appropriate suggestions) for improvement for your chosen company.
2. DuPont method: Return on invested capital is a good indicator of firm’s overall performance. How the return on equity (ROE) changed over the past three years for your chosen company and the competitor? Decompose ROEs into profitability, efficiency, and leverage for the three-year period. Analyse the factors which drive the recent changes in ROE and provide relevant suggestions for improvement.
3. Working capital management: Calculate the operating cycle and cash conversion cycle of your chosen company and its competitor (hint: refer to Figure 19.2 on page 632 of the textbook). In the calculation, assume credit sales account for 20% of the total sales revenue. What are the implications behind the results?
4. Market ratios: Calculate or retrieve the Pricing-earnings ratio (P/E) of your selected company and the competitor from Yahoo!Finance. Interpret their P/E ratios in combination with the analysis above. How does the “Mr Market” view these two companies?
5. Conclude & discuss limitations of the above analysis
Note: It is highly recommended to use Microsoft Excel to create the charts and tables for ease of calculation and better presentation.
• The required word length for this report is 2000 words (exclude tables, plus 10% tolerance).
• You are required to use at least five (5) references for this report including sources such as books, industry-related journals, magazines, company documents and academic journal articles.
• Use the 4 sources (Modules) .
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