PART 1 (15 Points)
Using the financial statements for a mystery company provided on the assignment 1spreadsheet, calculate all of the ratios for all five years. If you use excel and link the equations in the first year, you can drag them across and excel will calculate all the other years for you. This is a great time saver! See the help video if you don’t know how to do this. .
PART 2 (15 Points) – Calculate Common-Size Financial Statements and Complete a Financial Statement Analysis
Common size financial statements will help you in your time-series analysis. Go to the Income Statement and the Balance Sheet tabs and create a common-size statement out to the side of the original ones. Then complete a financial statement analysis listing a few points of interest. You should also mention some of your findings in your Summary (Part 4). (A financial statement analysis is basically just taking a look at the financial statements to get an overall picture of the company. For instance, by looking at the amount of revenues generated, you can get an idea about the size of a company and by looking at multiple years, you can learn if the revenues are growing or dropping. Both are important bits of information about the company.)
PART 3 (50 Points) – Analyze and Explain the Ratios
On the same spreadsheet, analyze the firm’s overall financial situation. Break your analysis down into the following categories: liquidity, activity, leverage/coverage, and profitability. Then, complete a DuPont System Analysis. Refer to the ratio analysis example in your text – Chapter 3, section 3.8(page 80). This will get you started. Note: You are not required to do the market ratios. This is because the information you need to complete those is not found on the Income Statement or Balance Sheet.
Notice that on the spreadsheet, there are two separate text boxes under each ratio category.
In the first text box, complete a ratio analysis similar to the example in your textbook, including a time series analysis and comparison to the industry averages. This should also include an overall summary of how the company is performing in each of the different categories. Please elaborate a bit. Explain to me how the company is doing and what you are basing your opinion on.
In the second box describe and explain each individual ratio. What specific information is each of the ratios giving you?
Example for the first text box: for liquidity, (example is NOT the same company as the assignment) The ratios show that the company has enough operating income to easily pay its current debt. The liquidity ratios for this company are in the same range as the industry averages and it has been stable over the entire 5 year period. Therefore, the overall liquidity of this company appears to be good.
Example for the second text box: If you have a current ratio of 1.5, that means that for every dollar of current debt, you have 1.5 dollars of assets. This is a good thing because it means you have enough money to pay your current bills! However, if the current ratio is .65, this is not a good thing, because for every dollar of bills, you only have 65 cents to pay them and that means you have a liquidity problem. Understand that the liquidity ratios are only telling you about a company’s operations (current obligations) – so just because a company has a .65 current ratio does not necessarily mean that the company is headed for bankruptcy – you would need a little more information to determine that. You should also explain the difference between the current ratio and the quick ratio and what the two ratios together tell you. Please do this in your own words, don’t just state the definition of the ratios from the text. I want you to think about what each ratio means, and then tell me what you think.
PART 4 (20 Points) – Summary
This is where you put all of the information you have attained into a summary stating your impression of the overall condition of the company and your recommendations of what needs to be accomplished going forward. (I am NOT asking you whether or not you would invest in this company, I’m asking if you were the manager of this company, what you would do.) You should also have gained some information from your financial statement analysis and your common-size statements. Include some of that information here. For instance, if you noticed that the total revenue for the company has decreased dramatically in the current period, that would be an important piece of information to include in the summary. Of course, you will also need to give some explanations as to what might have been the cause of this decrease in revenue and what the company needs to do to prevent future declines.
BONUS QUESTION (5 Points)
Answer the bonus question.
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