Corporate Finance: Financial Ratio Analysis

27 Jun Corporate Finance: Financial Ratio Analysis

ASSIGNMENT

Purpose of Assignment

The purpose of this assignment is to help students gain a better understanding of the financial statements used for corporate financial reporting and the key ratios used to make business decisions. 

Assignment Steps 

1) Select a Fortune 500 Company from one of the following industries:

· Pharmaceutical

· Energy

· Retail

· Automotive

· Computer Hardware

2) Review the balance sheet and income statement in the company’s 2015 Annual Report.

3) Calculate the following ratios using Microsoft® Excel®:

· Current Ratio

· Quick Ratio

· Debt Equity Ratio

· Inventory Turnover Ratio

· Receivables Turnover Ratio

· Total Assets Turnover Ratio

· Profit Margin (Net Margin) Ratio

· Return on Assets Ratio

4) Analyze in 1,050 words why each ratio is important for financial decision making.

Each type of ratio should have its own section in the paper: Section headings are required by APA.

Look at the ratios and make sure that they’re appropriate. For example, a service company (e.g. FedEx, Yahoo) doesn’t produce a product, so there is no inventory, thus an inventory turnover ratio would be meaningless, so that is why the list above is restricted. A company with little or no debt would have a debt-to-equity ratio that might not change much from year to year.

 

Put small tables for each category in the paper and discuss each set.

Like this:

Ratios	2015
X ratio	1.6	1.6
y ratio	1.94	1.94
z ratio	2.55	2.55
	1.57	1.57
	1.91	1.91

Or this:

Liquidity ratios

	2015
Current ratio	Current Assets / Current liabilities	1.43
Quick ratio	Current asset – inventories / Current liabilities	1.37

DO NOT put huge tables in your paper as it is too hard to read and will cause you to lose points.

Here’s a list of the ratios from the textbook:

SHORT-TERM SOLVENCY RATIOS

Current ratio = Current assets ÷ Current liabilities

Quick ratio = (Current assets – Inventory) ÷ Current liabilities

Cash ratio = Cash ÷ Current liabilities

FINANCIAL LEVERAGE RATIOS

Total debt ratio = Total debt ÷ Total assets = (Total assets – Total equity) ÷ Total assets

Debt-equity ratio = Total debt ÷ Total equity

Equity multiplier = Total assets ÷ Total equity = 1 + debt-equity ratio

Times interest earned = Earnings before interest and taxes ÷ Interest

Cash coverage = (Earnings before interest and taxes + depreciation + amortization) ÷ Interest

TURNOVER RATIOS

Inventory turnover = Cost of goods sold ÷ Inventory

Days sales in inventory = 365 ÷ Inventory turnover

Receivables turnover = Sales ÷ Receivables

Days’ sales in receivables= 365 ÷ Receivables turnover

Total asset turnover = Sales ÷ Total assets

Days in inventory = Days in period ÷ Inventory turnover

PROFITABILITY MEASURES

Profit margin = Net income ÷ Sales

Return on assets = Net income ÷ Total assets

Return on equity = Net income ÷ Total equity

EBITDA margin = EBITDA ÷ Sales

MARKET VALUE RATIOS

Price-to-earnings ratio = Market price per share ÷ Earnings per share

Market-to-book ratio = Market price per share ÷ Book value per share

Market capitalization = Market price per share x Shares Outstanding

Enterprise Value (EV) = Market capitalization + Market value of interest bearing debt – cash

EV Multiple = EV ÷ EBITDA

Grading Rubric

Resources Required

Microsoft® Excel®

Content	Met	Partially Met	Not Met	Comments:
Selected a Fortune 500 Company from one of the following industries: · Pharmaceutical · Energy · Retail · Automotive · Computer Hardware
Reviewed the balance sheet and income statement in the company’s 2015 Annual Report.
Calculated the following ratios using Microsoft® Excel®: · Current Ratio · Quick Ratio · Debt Equity Ratio · Inventory Turnover Ratio · Receivables Turnover Ratio · Total Assets Turnover Ratio · Profit Margin (Net Margin) Ratio · Return on Assets Ratio
Analyzed in 1,050 words why each ratio is important for financial decision making.
		Total Available	Total Earned
		5	#/5

Writing Guidelines	Met	Partially Met	Not Met	Comments:
The paper—including tables and graphs, headings, title page, and reference page—is consistent with APA formatting guidelines and meets course-level requirements.
Intellectual property is recognized with in-text citations and a reference page.
Paragraph and sentence transitions are present, logical, and maintain the flow throughout the paper.
Sentences are complete, clear, and concise.
Rules of grammar and usage are followed including spelling and punctuation.