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Financial Statement Analysis
Directions
This Assessment is separated into four parts. In Part 1 of this Assessment, you will begin by researching and summarizing four of the benefits of financial analysis and indicating which is the most significant to you. In Part 2 of this Assessment, you will define and properly classify the financial classifications and ratios listed below. In Part 3 of this Assessment, you will calculate and explain the significance of the Liquidity, Profitability, and Market Value financial ratios, and provide a year to year comparison of assessed financial trends. In Part 4 of this Assessment, you will compose an analytical essay in a minimum of 350 words reporting the one financial measurement trend you find to be most significant.
Use the Word template provided to complete your Assessment.
Questions
Part 1.
Locate and read the following article:
Faello, J. (2015). Understanding the limitations of financial ratios. Academy of Accounting & Financial Studies Journal, 19(3), 75-85.
Refer to pages 75 and 76 of Faellos (2015) work. In four separate paragraphs (one for each question), summarize four of the benefits of financial analysis mentioned in the journal article. In one paragraph, describe which one of the four benefits you consider to be most significant.
Review the following financial data, then answer the questions below.
Income Statement and Balance Sheet
Company X Income Statement
FYE 2014 and 2015
Period Ending
31-Jan-15
31-Jan-14
Total Sales
$ 485,651,000
$ 476,294,000
Cost of Goods
365,086,000
358,069,000
Gross Profit
120,565,000
118,225,000
Selling General and Administrative
93,418,000
91,353,000
Operating Profit
27,147,000
26,872,000
Total Other Income/Expenses Net
113,000
119,000
Earnings Before Interest And Taxes
27,034,000
26,753,000
Interest Expense
2,461,000
2,335,000
Income Before Tax
24,573,000
24,418,000
Income Tax Expense
7,985,000
8,105,000
Net Income From Continuing Ops
16,588,000
16,313,000
Discontinued Operations
285,000
144,000
Net Income (Net Profit)
$ _ 16,303,000
$ _ 16,169,000
14,000,000 shares outstanding
Market Share price per share
$ 10.00
$ 9.00
Company X Balance Sheet
FYE 2014 and 2015
Period Ending
31-Jan-15
31-Jan-14
Assets
Current Assets
Cash and Cash Equivalents
$ 9,135,000
$ 7,281,000
Net Receivables
6,778,000
6,677,000
Inventory
45,141,000
44,858,000
Other Current Assets
2,224,000
2,369,000
Total Current Assets
63,278,000
61,185,000
Property Plant and Equipment
116,655,000
117,907,000
Goodwill
18,102,000
19,510,000
Other Assets
5,671,000
6,149,000
Total Assets
203,706,000
204,751,000
Liabilities
Current Liabilities
Accounts Payable
58,583,000
57,174,000
Short/Current Long Term Debt
6,689,000
12,082,000
Other Current Liabilities
–
89,000
Total Current Liabilities
65,272,000
69,345,000
Long Term Debt
43,692,000
44,559,000
Deferred Long Term Liability Charges
8,805,000
8,017,000
Minority Interest
4,543,000
5,084,000
Total Liabilities
122,312,000
127,005,000
Miscellaneous Stocks Options Warrants
0
0
Common Stock
323,000
323,000
Retained Earnings
85,777,000
76,566,000
Capital Surplus
2,462,000
2,362,000
Other Stockholders Equity
-7,168,000
-1,505,000
Total Stockholders Equity
81,394,000
77,746,000
Total Liabilities + Stockholders Equity
$ 203,706,000
$ 204,751,000
Number of Shares Outstanding
14,000,000
14,000,000
Market Share price per share
$ 10.00
$ 9.00
Part 2.
Define the ten financial ratios below.
Financial Ratios:
Current Ratio
Quick Ratio
Accounts Receivable Turnover as a multiple
Accounts Payable Turnover as a multiple
Return on Equity as a percent
Return on Assets as a percent
Operating Profit Margin as a percent
Net Profit (after tax) Margin as a percent
Earnings per Share as a dollar value
Price to Earnings as a multiple
Part 3. Classify, calculate, and assess a) Liquidity and Turnover management of Current Assets and Liabilities, b) Profitability, and c) Market Value ratios. Please note outcomes as a multiple, percent, or dollar value.
Liquidity and Turnover management of Current Assets and Liabilities
In this section, properly classify which of the above (from Part 2) are the liquidity and turnover ratios. Then, using the data from the Income Statement and Balance Sheet, provide the correct calculation of these four liquidity and turnover ratios and an assessment of the companys ability to maintain liquidity and the management of current assets and current liabilities.
Include the proper assessment of outcomes as positive or negative trends when all four ratio outcomes are factored as a group.
b. Profitability
In this section, properly classify which of the above (from Part 2) are the profitability ratios. Then, using the data from the Income Statement and Balance Sheet, provide the correct calculation of these four profitability ratios and an assessment of the companys ability to maintain if not improve profitability based on the amounts of Equity, Assets, and levels of profits from Sales. Include the proper assessment of outcomes as positive or negative trends when all four ratio outcomes are factored as a group.
c. Market Value
In this section, use the price per share data, the Income Statement and Balance Sheet to provide the correct calculation these two Market Value ratios; Earnings per Share (EPS) and Price to Earnings (P/E) ratio.
Given the changes of EPS from one year to the next, what is your assessment of the company’s net income theoretically available for payment for investors holding common stock? As an investor to what extent are you more or less confident of the companys ability to add value to your ownership position?
Based on the companys P/E ratio changes from one year to the next what might this tell us about either investor sentiments of future profits, or stock price/value given the ability to generate income at a set price?
Part 4. Overall Analysis
In this section, you will compose an analytical essay in a minimum of 350 words. Based on the above, provide a proper assessment of the companys most significant negative trend and what corrective actions can be taken to improve results. You should search the Library, your textbook, and the internet using a variety of criteria to find academic sources that will support your assessment of the trends and actions that could be taken.
Please address items 1 and 2 as the preliminary portion of your assignment. And build on that commentary as the body of your overall assessment.
1. The most significant concern is
2. The quantitative aspect of this assessment of negative trends is based upon ratios and comparative data
Followed by:
The corrective actions, research findings on interpreting financial ratio outcomes from Library, textbook, etc;, conclusion and references
Minimum Submission Requirements
This Assessment should be in a separate Microsoft Word document. Use this template for your Assessment.
Respond to the questions in a thorough manner, providing specific examples of concepts, topics, definitions, and other elements asked for in the questions. Your paper should be highly organized, logical, and focused.
Your paper must be written in Standard English and demonstrate exceptional content, organization, style, grammar, and mechanics.
Your paper should provide a clearly established and sustained viewpoint and purpose.
Your writing should be well ordered, logical and unified, as well as original and insightful.
A separate page at the end of your paper should contain a list of references, in APA format. Use your textbook, the Library, and/or the internet for research.
Be sure to cite both in-text and reference list citations were appropriate and reference all sources. Your sources and content should follow proper APA citation style. Review the APA formatting and citation style resources found in the Writing Center. The Writing Center can be found in the Academic Success Center in the Academic Tools area of your course. (It should be in Times New Roman 12-point font, include correct citations, Standard English with no spelling or punctuation errors, and correct references at the bottom of the last page.)
