Overview
The final project for this course is the creation of a financial statement analysis.
A business's financial statements offer important insights into its performance and financial health that help guide internal managers' and external investors' resource allocations. For a financial analyst, being able to accurately read and interpret these statements is a critical tool in making sound recommendations to clients or company executives. Analysts also need to understand how the limitations of these statements and the legal and ethical obligations that underpin them impact business decisions.
Throughout this course, you will examine different types of financial statements, key performance indicators, and the information underlying them. In the summative assessment, you will apply this knowledge by analyzing a set of financial statements-including an income statement, balance sheet, and cash flows-from a publicly traded company over a three-year period. You will select a company of interest early in the course, subject to instructor approval. You will then create a basic financial statement analysis report geared toward company managers that identifies actions the company can take to improve its financial performance and its attractiveness to outside investors while maintaining ethical reporting standards. The analysis will be supported by appendices showing the relevant financial reports, indicators, and analysis.
The project is divided into four milestones, which will be submitted at various points throughout the course to scaffold learning and ensure quality final submissions. These milestones will be submitted in Modules Two, Three, Four,and Five.The final submission will occur in Module Seven.
In this assignment, you will demonstrate your mastery of the following course outcomes:
• Assess the role of financial statements in evaluating the overall performance of an organization.
• Analyze business financial statements by using key financial performance indicators and industry benchmarks.
• Recommend simple corrective actions to management for improving companies' financial situation based on financial statement analysis.
• Apply common financial statement indicators and analysis for assessing the investment potential of a given company for external investors.
• Evaluat.e the impact of financial reporting ethics on business decision making and stakeholders.
Prompt
For this assessment, imagine you are a financial analyst working for the director of finance at the publicly traded company that you selected earlier in the course. Your role is to evaluate the company's financial performance, as reported in its financial statements over a three-year period, using the analytical techniques you have learned. Based on your findings, you will prepare a financial statement analysis report for the director, supported by appropriate indicators and analytical tools, which lays out the current situation and suggests ways to improve company performance. Because the director also wants to make sure the company is attractive to potential outside investors, s/he has also asked you to review the statements with an eye as to how those investors would view the company.
Remember that your recommendations should comply with existing legal and ethical standards and that the report should present ideas clearly and concisely to a busy manager.
Specifically, the following critical elementsmust be addressed:
I. Executive Summary. This section should provide a brief context for your financial statement analysis and a summary of your principal findings. Note that although this section comes first in the paper, you will write it after you have performed your analysis. Specifically, you should:
a) Provide a brief contextfor the company that helps situate it in the larger business environment. Be sure to explain how this context impacts financial statement analysis. For example, how large is the company? What industry is it in? What companies are its major competitors? What trends or recent events might affect company or industry performance? How might these things be reflected in financial statements?
b) Summarize key findingsand recommendations from your analysis clearly and concisely. For example, what does your analysis suggest regarding internal changes? Would outside investors find your company attractive? This should be one high-level summary paragraph. Supporting details and rationale will be provided in later sections.
II. Analysis. Use this section to present your findings based on quantitative and qualitative analysis of the financial statements. Include a copy of the financial statements and any ratios or analysis in an appendix as support for your text. In particular, this section should cover:
a) Describe the financial statements' rolein evaluating company performance. Briefly and in general terms:
1. Assess the strengths and limitationsof financial statement analysis in evaluating a company's performance. Be sure to explain how those strengths and limitations affect your analysis. In other words, what can the company's financial statements tell you about its performance and limitations, and how does that information affect interpretation of results?
2. Explain why it is important that these statements be completed accurately and ethicallyand what the ramifications are if they are not.
b) Approach. Briefly and in general terms, explain the types of analysis you performed and why. You should focus on the key measurements and how you used them to inform your analysis. For example, you might note that you performed profitability analysis to determine the company's growth potential and viability.
c) Key Ratios. Use this section to discuss key performance indicators (ratios). Be sure to show your calculations for each indicator in an appendix. Specifically, you must look at:
1. Profitability: Accurately present and explain the significance of the profit margin, return on assets, return on equity, and return on capital ratios for this company. In other words, what are the ratio values for this company, and what do they suggest for informing decisions to buy or sell company shares or change management procedures?
2. Liquidity: Accurately present and explain the significance of the current, quick, and cash ratios for this company. In other words, what are the ratio values for this company, and what do they suggest for informing decisions to buy or sell company shares or change management procedures?
3. Debt: Accurately present and explain the significance of debt, debt-equity, and interest coverage ratios for this company. In other words, what are the ratio values for the company, and what do they suggest for informing decisions to buy or sell company shares or change management procedures?
4. Operating performance: Accurately present and explain the significance of the fixed-asset turnover ratio for this company. In other words, what is the ratio value for this company, and what does it suggest for informing decisions to buy or sell company shares or change management procedures?
5. Cash flow: Accurately present and explain the significance of the dividends payout ratio for this company. In other words, what is the ratio value for this company, and what does it suggest for informing decisions to buy or sell company shares or change management procedures?
6. Investment valuation: Accurately present and explain the significance of the price/book value, price/earnings, price/sales, and dividend yield ratios for this company. In other words, what are the ratio values for this company, and what do they suggest for informing decisions to buy or sell company shares or change management procedures?
d) Vertical Analysis. Perform a vertical analysis of the income statement and the balance sheet from the most recent year in order to answer the following questions. Be sure to include supporting calculations and a vertical analysis spreadsheet in an appendix.
1. Do any items in your vertical analysis stand out? Why or why not? Be sure to provide specific examples and explain what elements you considered in arriving at your answer.
2. What does your vertical analysis suggest for managing the company's financial health? Be sure to justify your response. For example, are there things the company might want to look at more closely? Why or why not?
3. What does your vertical analysis suggest with respect to how potential investorswould view the company? Justify your response. For example, are there items that might make potential investors less likely to buy the company's stock? Are there items that might make potential creditors wary about lending to the company? Why or why not?
d) Horizontal Analysis. Perform a horizontal analysis of the same key performance measures covered by your vertical analysis to examine trends for the company over a three-year time period. Use your analysis to answer the following questions and include supporting calculations and horizontal analysis spreadsheet in an appendix.
1. Do any items in your horizontal analysis stand out? Why or why not? Be sure to explain what elements you considered in arriving at your answer.
2. What does your horizontal analysis suggest for managingthe company's financial health? Be sure to justify your response. For example, are there things the company might want to look at more closely? Why or why not?
3. What does your horizontal analysis suggest with respect to how potential investorswould view the company? Justify your response. For example, are there any items that might make potential investors less likely to buy the company's stock? Are there items that might make potential creditors wary about lending to the company? Why or why not?
f) Benchmarks. Analyze the company's performance relative to the industry average. The average should refer to the same period as the financial statements being analyzed (or as close as possible). Specifically, you should answer:
1. Why is benchmarking importantin analyzing financial statements and evaluating a company's overall performance? In other words, does analyzing a specific company's financial statements in isolation provide you with sufficient information for analyzing its overall performance? Why or why not?
2. What do bench marking comparisons tell you about how the selected company is performing relative to industry peers? Support your answer with specific examples from your analysis and industry research.
3. How do your company's financial statements compare to industry standards in terms of legally and ethicallycommunicating necessary information to stakeholders? Justify your response using specific examples and referencing relevant legal and ethical guidelines.
III. Conclusions. Based on your analysis, what overall conclusions would you draw regarding the following questions?
a) Would outside investorsfind the company attractive as a potential investment? Why or why not? Use examples from your analysis to support your answer.
b) What simple corrective actions might the company take to improve its financial situation? Support your response using your analysis and relevant course information.
c) What legal and ethicalconsiderations does the organization need to consider in implementing these recommendations? How would these affect stakeholders' decision making? Support your response referencing relevant legal and ethical guidelines.
Guidelines for Submission:Your financial statement analysis report should include a 3-5 page executive summary plus all supporting appendices that contain the original financial statements, calculations, analyses, and conclusions. Word documents should be double-spaced, 12-point Times New Roman font, and should use the most current APA format for references.