Fluent Essays

Background Information Up until this point in the course, you have been practicing financial analysis techniques on hypothetical companies. The financial statements you have been studying are intentionally simplified, to aid in your learning process. However, now we are going have an opportunity to apply the concepts and techniques you have learned to a real-world company of your choice, with all their complexities. In this assignment, you are going to play the role of consultant, hired to evaluate a company’s financial strength in anticipation of a tremendous growth opportunity. The company is going to launch a revolutionary new product that will grow its sales by at least 50\% over the next year. In addition, to support this sales growth, the company will have to grow its investment in fixed and current assets by 50\%. Your job is to assess the company’s ability to support this level of growth by performing a basic horizontal (trend) and ratio analysis. Begin by selecting a company you are interested in studying. It is highly recommended you choose a company that would be beneficial for you to learn more about, such as one that is in your current industry. However, the only requirement is that you select a publicly traded company whose financial statements are readily available. You will then be asked to dig deep into this company’s financial statements, looking at trends and ratios to assess its financial strength and readiness for rapid growth. Instructions Review the rubric to make sure you understand the criteria for earning your grade. In your textbook, Analysis for Financial Management, read Chapter 2, “Evaluating Financial Performance.” Download and review the Higgins Chapter 2 Slides to help you further understand the chapter. In your textbook, Principles of Accounting, study Appendix A, “Financial Statement Analysis.” Research the financial statements for a company of your choice. You can locate the annual statements (called “10-K” forms) for all public U.S. companies in the SEC’s EDGAR system. Annual statements will often include commentary explaining recent financial changes and events. Many free financial websites, such as Morningstar, provide financial data and ratios for public companies. Search for your company on Morningstar and then select “Operating Performance” for a list of ratios for previous years. Consider accessing company reports through OCLS using the Business Insights: Essentials tool. Detailed financial and investment reports are available for hundreds of companies. Prepare a paper analyzing the company’s past three years of financial results: Begin by creating a table listing at least 10 financial ratios for the last three years (three years trend, 10 ratios, 30 ratios total). You can either calculate these ratios yourself using the financial data found, or use the ratios you find from your sources. The ratios you study are up to you. Use whatever ratios you find most revealing. However, you should include return on equity (ROE) and its three components: total asset turnover, profit margin, and financial leverage (asset/equity or debt/equity).  Evaluate and comment on any interesting trends you find. What ratios have changed significantly over the past three years? What does this indicate? Do the ratios suggest financial strength? What potential weaknesses do you see? What could the company do to improve these ratios? Conclude with a recommendation, based on your analysis, as to whether the company is prepared to take on a large growth opportunity. Be sure to provide a detailed recommendation that demonstrates your critical thinking and understanding of financial analysis. Your finished paper should be 500 to 600 words in length. Prepare your paper in Microsoft Word in a professional manner, using proper spelling, grammar, and APA style. Include a reference list. Be sure to appropriately cite your sources for your financial data and any commentary or analysis you rely upon. For questions on APA style, go to OCLS APA Writing Styles Guides.   Preview Rubric 3.5 Assignment (50 Points) This table lists criteria and criteria group name in the first column. The first row lists level names and includes scores if the rubric uses a numeric scoring method.CriteriaLevel 4Level 3Level 2Level 1Criterion ScoreTable of Ratios15 points (14-15 Points) You demonstrated insightful critical thinking in researching, selecting, and presenting financial ratios in a manner that was comprehensive and clear. 13 points You demonstrated competent critical thinking in researching, selecting, and presenting financial ratios in a manner that was clear. 12 points (11-12 Points) You demonstrated competent critical thinking in researching, selecting, and presenting financial ratios, with some mistakes, or in a manner that was not entirely clear. 10 points (0-10 Points) You demonstrated little to no critical thinking researching, selecting, and presenting financial ratios, with serious mistakes, or in a manner that was very unclear. / 15Interpretation of Ratios15 points (14-15 Points) You demonstrated clear, insightful critical thinking and provided a detailed response when you explained trends and interpreted the selected ratios to evaluate the company’s financial strength. 13 points You demonstrated competent critical thinking and provided a full response when you explained trends and interpreted the selected ratios to evaluate the company’s financial strength. 12 points (11-12 Points) You demonstrated competent critical thinking when you explained trends and interpreted the selected ratios to evaluate the company’s financial strength, with some minor errors. 10 points (0-10 Points) You demonstrated little to no critical thinking when you explained trends and interpreted the selected ratios to evaluate the company’s financial strength, or your interpretation had multiple serious errors. / 15Conclusion and Recommendations10 points Your recommendations were clear, detailed, well-founded, and insightful. 9 points Your recommendations were clear and well-founded. 8 points Your recommendations had minor errors, were not entirely clear, or were not well-founded. 7 points (0-7 Points) Your recommendations had serious errors or were unclear. / 10Writing Quality10 points Your sentence structure is complete with correct spelling, punctuation, and capitalization and varied diction and word choices. Your assignment length is correct with sources correctly cited. 9 points Your sentence structure has minor errors (fragments, run-ons) with correct spelling, punctuation, and capitalization but limited diction and word choices. Your assignment length is correct with sources correctly cited. 8 points Your sentence structure has several errors in sentence fluency with multiple fragments/run-ons and poor spelling, punctuation, and/or word choice. Your assignment length is inappropriate with several citation errors. 7 points (0-7 Points) Your sentence structure has serious and persistent errors in sentence fluency, sentence structure, spelling, punctuation, and/or word choice. Your assignment length is inappropriate with several citation errors or sources are not cited. / 10Evaluating Financial Performance Chapter Two Copyright © 2019 by McGraw-Hill Education. All rights reserved. Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 1 The Levers of Financial Performance A pilot uses levers to control a the flight of an aircraft. Operating decisions are the levers by which managers control financial performance. In this chapter, we study how financial statements help us to analyze the performance of the firm. Our primary tool is ratio analysis. Ch. 2 2 Higgins, Analysis for Financial Management, 12e Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 2 Return on Equity Return on Equity: The most popular measure of financial performance = 29.6\% Why does this definition make sense? Ch. 2 3 Higgins, Analysis for Financial Management, 12e Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 3 The 3 Determinants of ROE How is this a measure of leverage? Ch. 2 4 Higgins, Analysis for Financial Management, 12e Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 4 TABLE 2.1 ROE and Levers of Performance for 10 Diverse Companies, 2016 Ch. 2 5 Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Higgins, Analysis for Financial Management, 12e Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 5 Questions about Table 2.1 Differences in ROE across firms is less than differences in components. Why? What is the role of competition in ROE differences? Is there any reason why profit margin and asset turnover should be negatively related? Ch. 2 6 Higgins, Analysis for Financial Management, 12e Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 6 You try it. Calculate ROE and the levers of performance. Ch. 2 7 Higgins, Analysis for Financial Management, 12e Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Nordstrom: Profit margin=354/14,757=2.4\%; Asset turnover=14,757/7,858=1.9; Leverage=7,858/870=9.0; ROE=2.4\%×1.9×9.0=40.7\% Walmart: Profit margin=13,643/485,873=2.8\%; Asset turnover=485,873/198,825=2.4;