Financial Statement Analysis
In order to determine if you can recommend buying or selling a stock, you first must understand how the company has performed recently. Would you want to invest in a company that has had negative earnings for the past 3 years? What about a company that has increased the amount of debt on its balance sheet? Or, would you prefer to invest in a company that has had consistent increases in revenues or net earnings over the past 3 years? As the equity analyst, your first task would be to determine the evidence of patterns in the recent financial performance. The financial analysis provides significant insight into the company’s strengths and weaknesses.
To fully understand a company’s financial performance, you cannot “evaluate performance using numbers alone. This level of analysis does not involve an understanding of the cause of performance…an analyst must look beyond the numbers” (Hickman et al., 2013, Section 11.3, para. 7). In the real world, an analyst spends extensive time and effort researching the business strategy, operations, marketing, and other elements that have contributed to this financial performance. For this class, you will limit your investigation of the company to the historical financial analysis, ratio and competitive analysis, and the valuation of the stock. This Week 1 assignment will become Section 1 of the Week 5 final project.
Prepare:
Prior to beginning work on this assignment,
Review the Week 1 Model Assignment (Links to an external site.).
Make sure you have completed both Week 1 – Assignment 1 and Week 1 – Assignment 2. It is recommended that you keep those Excel or PDF documents available when completing this assignment.
Write:
For this assignment, address the following seven parts in a Word document:
Part 1:
Overview of the company (one paragraph)
State the name of the company.
Provide a brief overview of the company you selected, including a description of its business operations.
State the current market price per share.
Part 2:
Income statements (one to two paragraphs)
Summarize key trends in revenues, operating income, and net income over the last 3 years.
Part 3:
Common size income statements (one paragraph)
Evaluate the trends in gross margin, operating income margin, and net profit margin over the past 3 years.
Part 4:
Balance sheets (one to two paragraphs)
Summarize key trends in total assets, total current assets, total current liabilities, long-term debt, and total shareholders’ equity over the past 3 years.
Part 5:
Common size balance sheets (one paragraph)
Evaluate the trends in total current assets as a percent (%) of total assets, total current liabilities as a percent (%) of total assets, long-term debt as percent (%) of total assets, and total shareholders’ equity as a percent (%) of total assets over the past 3 years.
Part 6: Cash flow (one paragraph)
Calculate simple cash flow for the past 3 years.
Show your calculations.
Summarize the trend in simple cash flow for the past 3 years.
Compare the simple cash flow to the net operating cash flow from the statement of cash flows for the past 3 years.
Part 7:
Financial analysis conclusion: (one paragraph)
Determine the strengths and weaknesses of the company based primarily on the trends in items discussed from the income statements, balance sheets, common size income statements, and common size balance sheets, as well as the comments on cash flow.
Create a table that indicates whether each financial fact is a strength or a weakness.
Determine the overall financial strength of the company based on the financial facts included as strengths or weaknesses.
Categorize the overall financial performance of the company as strong, neutral, or weak.
Justify your conclusion based on the table you created.
