Assignment on Financial Statement Analysis and EPS Forecasting
First, gather historic data from either SEC filings or Yahoo Finance on key financial statements of the firm by inputting its ticker symbol or name:
• Balance Sheet
• Income Statement
• Cash Flow Statement
Then prepare a report to answer the following questions:
Questions:
1. Compute the following ratios for the firm that you are analyzing, for the most recent period:
I. Short-term solvency, or liquidity, ratios
Current ratio = Current assets/Current liabilities
Quick ratio = (Current assets - Inventory)/ Current liabilities
Cash ratio = Cash/ Current liabilities
II. Long-term solvency, or financial leverage, ratios
Total debt ratio = (Total assets - Total equity)/Total assets
Debt-equity ratio = Total debt/Total equity
Equity multiplier = Total assets/Total equity
Times interest earned ratio = EBIT/Interest
Cash coverage ratio = (EBIT + Depreciation)/Interest
III. Asset utilization, or turnover, ratios
Inventory turnover = Cost of goods sold/Inventory
Days sales in inventory = 365 days/Inventory turnover
Receivables turnover = Sales/Accounts receivable
Days sales in receivables = 365 days/Receivables turnover
Total asset turnover = Sales/Total assets
Capital intensity = Total assets/Sales
IV. Profitability ratios
Profit margin = Net income/Sales
Return on assets (ROA) = Net income/Total assets
Return on equity (ROE) = Net income/Total equity
ROE = Net income/Sales x Sales/Assets x Assets/Equity
V. Market value ratios
Price-earnings ratio = Price per share/Earnings per share
Market-to-book ratio = Market value per share/Book value per share
2. Comment on the financial condition of the firm in each of the above V categories in 1 or 2 sentences each.
3. Decompose the ROE using the extended Du-Pont Analysis.
ROE = EBIT Margin x Interest Burden x Tax burden x Asset turnover x Leverage
4. Compare these components of ROE for the firm's current period its past periods to understand the time trends.
5. Compare these components of ROE for the firm's with its major competitor(s).
6. EPS forecasting: Now use these trends and your forecast of the economic conditions to forecast the firm's Earnings per share and cash flow per share. Start with the most recent income statement and common size it. For the forecast period, adjust the numbers for future growth and decline in sales.