Assignment Problem: Financial Report Analysis and Decision to invest in a Company
Aims of this assignment
This assignment aims to develop:
a) A highly proficient digital literacy through digitising financial statements into an excel spreadsheet and use these digitised financial statements to calculate and compare ratios to do the analysis showing the comparison in a graph.
b) An ability to understand and analyze financial reports,
c) Skills to compare financial information of two listed companies, and
d) Capacity to evaluate financial information and synthesize financial and non-financial information to make business decisions.
This assignment is to be completed on an individual basis.
Your submitted assignment must be entirely your own work. You may seek guidance from the lecturer or fellow students to clarify concepts or the application of concepts to company financial statements in general. Any clarification you need to do the assignment you have to put your questions in the course Teams site, so all students will benefit from the questions and the answers. Advice that is clearly associated with the assignment tasks cannot be sought or provided.
Assignment overview:
You work as the investment manager of Capital Investments Ltd. The CEO of the company, Mr. Barings, asked you for advice to invest $10,000,000 in shares of either Michael Hill International Ltd, Lovisa Holdings Ltd or in none of these companies.
Both Michael Hill and Lovisa have offered Capital Investments Ltd, a private placement of ordinary shares. The purpose of an increase in equity for each company is to raise funds to finance an expansion of operating capacity. The CEO of Capital Investments has to make a recommendation to the Board of Directors whether to accept Michael Hill's offer to sell to Capital Investments a new issue of ordinary shares and reject Lovisa's offer, or accept Lovisa's offer to sell to Capital Investments a new issue of ordinary shares and reject Michael Hill's offer or alternatively reject both offers.
Obtain each of the company's annual reports for the 2017 and 2019 financial years from the companies' website and Lovisa:
The annual report contains the Chairman's report, the CEO's report, the Directors report and the Financial Statements (Balance Sheet, Income Statement, Statement of Changes in Equity, Statement of Cash Flows and Notes to Financial Statements). The financial statements include comparative figures from the prior year; therefore, you will have data for four financial years: 2019, 2018, 2017 and 2016.
Familiarize yourself with the industry in which these companies operate and with their Annual Reports.
Assignment tasks:
Before commencing work on the tasks below refer to the Individual Assignment Rubric for the criteria and standards that will be applied in the assessment of your assignment.
You have to upload your Excel Worksheet and a Word Document report. They must include the following tasks:
1. Excel Worksheet (Rubric 1)
- Allocation of marks for each part according to the rubric.
1.1 Digitize the 4-years comparative income statement, balance sheet and statement of cash flows in an excel worksheet. Use a different worksheet for the two companies, worksheet 1one for Michael Hill and worksheet 2 for Lovisa. The first column for each financial statement is the column of the accounts, sub-totals and totals of the statement. The second column is the year 2019, the third column the year 2018, then the year 2017 and finally the year 2016. Always use the year reported in the most current financial statement (e.g. the year 2018 that is reported in the comparative financial statements 2019) because sometimes companies make adjustments to the financial statements in the following Annual Report.
1.2 Use the formulas provided for the assignment to calculate the following ratios for each company for the years 2019, 2018 and 2017: current ratio, quick ratio, current cash debt coverage, receivables turnover, inventory turnover, debt to assets ratio, times interest earned, ROE, ROA, profit margin, asset turnover, gross profit rate and price-to-earnings ratio. These ratios should be calculated using the Excel formulas with the integer plus 2 digits if it is a percentage, or in decimals with four digits. The ratios must be listed comparatively in 3 columns for the years 2019, 2018, and 2017. (See format in the Appendix)
1.3 Select the five most relevant ratios to do the analysis to recommend the investment (or no investment) of the $10,000,000. Choose the ratios based on:
a) The relevance of the ratio for the decision to be made (investment of $10,000,000 in shares of one of these companies).
b) The significance of the difference between the ratios of the two companies (i.e. the differences between the ratios is significant enough to make a difference in the decision to be made).
c) From the 5 ratios, 3 ratios should evaluate profitability and the other 2 ratios should evaluate liquidity and/or solvency.
1.4 Prepare five graphs (one per each ratio chosen)in a different worksheet (worksheet 3) comparing both companies in the period from 2017 to 2019.
2. Word Document
The Word document is the report of your analysis. In this report you have to include the following headings:
2.1 Company background research
Review Michael Hill's and Lovisa's annual reports and any other sources of information. Write a short response to each item below to build background knowledge of each company and their industry (max: 150 words; min: 100 words).
a) Describe the operating activities and businesses of each company noting similarities and differences between Michael Hill and Lovisa.
b) Describe the composition of the Board of Directors and the Board Committees. Identify significant changes in the BOD and in the management of these companies in the last three years. Identify any concern raised in the Chairman, CEO and/or Directors' report.
2.2 Comparative analysis
From the ratios calculated in the Excel worksheet, provide a comparative analysis of the five ratios chosen to evaluate a) profitability and b) liquidity and/or solvency(max: 200 words; min: 100 words per ratio - you can use dot points for ratio analysis discussion).
For the analysis, obtain additional data from the financial statements and notes to the financial statements. The analysis should include an interpretation of changes in the ratios over the three years and how they affected a) profitability of these companies, and b) liquidity, solvency and risk of each company. At the end of the comparative analysis of each ratio add a copy of the graph you prepared in the Excel worksheet.
2.3 Conclusion and Recommendation
a) A recommendation on whether Capital Investments should invest $10,000,000 in shares of Michael Hill or in shares of Lovisa or to do not invest in any of them must be stated. The recommendation must be supported by an explanation based on the conclusion of the analysis that justifies the decision made (max: 850 words; min: 150 words).
b) You have to explicitly and clearly provide your recommendation to Mr. Barings, so he can in turn provide a recommendation to the Board of Directors.
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