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 Marketline or any other database) or, else, can be calculated through its financial statements (annual reports). Obtain (or calculate if not available) the following financial ratios for the selected company from the most recent 5 years:
1. Liquidity Ratio – Current ratio
2. Capital structure ratio – Debt ratio
3. Efficiency ratio – Total asset turnover ratio
4. Profitability ratio – Net profit margin
Then, upon collecting observations, conduct the following analyses:
1. Peer-firm comparison & Trend analysis: Based on the five-year data, compare and elaborate on how the company AND the competitor were performing in terms of their liquidity, capital structure, efficiency and profitability ratios. Discuss the potential reasons (firm-specific, industry-specific, or macroeconomic reasons) behind their recent trends.
2. DuPont method: Return on equity (ROE) is a good indicator of a firm’s overall performance. How the ROE changed over the past five years for your chosen company and the competitor? Decompose ROEs into profitability, efficiency, and leverage for the five-year period. Which element had the most influence on the ROE? Provide relevant suggestions for improvement.
3. Working capital management: Calculate the operating cycle and cash conversion cycle of your chosen company and its competitor. In the calculation, assume credit sales account for 50% of the total sales revenue. What are the implications behind the results?
4. Market ratios: Calculate or retrieve the Price-earnings ratio (P/E) of your selected company and the competitor from Yahoo!Finance. Compare and interpret their P/E ratios in combination with the analysis above, what do you find?
5. Conclude & discuss the limitations of the above analysis. What are the current strengths/weaknesses of your chosen company if compared with the competitor? Why? Highlight any areas (and appropriate suggestions) for improvement for your chosen company.