02 Jan Identify the firms you

MBAA 518 – Managerial Finance

1

Financial Ratios Assignment and Research Activity

Note:This activity will be submitted as Activity 2.4. However, it is recommended you begin to start work on this activity in Module 1. Most of the content necessary to complete the assignment is provide in Module1. Submission of the assignment will occur in Module 2.

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This assignment will require you to perform some analysis of financial ratios and some research to further your understanding of financial ratios from other sources. You will select an industry and two firms within the industry as described below and analyze the Return on Equity (ROE) of both firms and the market valuation ratios.

To retrieve the data you will need to do the following steps:

Go to the Hunt Library website
Select the “Articles” tab (Databases)
Select “List All Research Databases”
Select “S” in the alphabetical tabs
Select “Standard and Poor’s Industry Surveys (S&P NetAdvantage)”
There are several different reports that can be found here.
For this assignment you will be looking at a number of ratios for a firm and comparing to industry averages.

To get information on the industry, you can use the Industry Surveys, click on the dropdown menu, then select the industry you are interested in, and then click the gold colored box with the play button in the box. There are a number of reports here and also a number of different reports.

The report will come up in the html format which is (in my opinion) the least useful. The PDF format provides a very good easy to use/read report with a large amount of information about the industry.If you click on Downloadable Company Data an excel spreadsheet will be available for firms in the industry.

The excel spreadsheet (Downloadable Company Data) includes a number of tabs each with different information of each of the firms some of which are ratios. Here you can get a quick overview of how a given firm is performing relative to peers; you could quickly calculate some averages for the industry etc. This could be helpful for use as you analyze projects, need an estimate for a similar project etc.

For this assignment we are going to focus on one ratio which can actually be calculated using three other ratios. That ratio is the Return on Equity. Return on Equity can be calculated in the following manor:

May 2015

MBAA 518 – Managerial Finance

2

ROE

= net profit margin

x

asset turnover

/ equity ratio

= earnings to owners

x

revenues

/ common equity

revenues

assets

assets

= earnings to owners

x

revenues

x assets

revenues

assets

common equity

look at what cancels and you are left with

earnings/equity which is ROE ROE is comprised of:

Profit Margin (bottom line)

Turnover (asset utilization)

Equity ratio (financial cushion)

A note on equity ratio: (equity/assets)

Say a firm had $100 in assets and $37 dollars in equity The equity ratio would be 37/100 or 0.37

What does that mean? How can a firm be financed?

How much came from equity (owners)? How much from creditors?

In this case for every dollar of assets, owner have funded 0.37 cents and creditors 0.63 cents.

The second set of ratios you will need to consider are market value ratios. How does the firm you selected compare to industry averages, main competitor(s) etc.

For this assignment, you will need to select an industry using the S&P Net advantage database and download the data. Select two firms one with a relatively high ROE and one with a relatively low ROE in the industry. Analyze each of the firms taking into consideration the components of ROE as identified above. This will require you to do some additional research regarding ROE analysis.

The information you will need is not all here or in the textbook. There are times in the workplace where you will be performing or asked to perform tasks that require some learning/teaching yourself. This assignment will require you to do that.

May 2015

MBAA 518 – Managerial Finance

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Hints:You may want to look at each of the components of ROE and compare those. You maywant to look up (another book, online, etc) DuPont Identity or DuPont Analysis. Realize the components you need to analyze may or may not be in the spreadsheet you download form net advantage. If not find what you need but make sure you document where you find any data used. (Yahoo finance is a good site and there are others.)

Some thoughts to keep in mind:

Marginsreflect the firm’s production function. If margins are low what could be done toimprove them?

Total asset turnoverdeals with the marketing function. If turnovers are low what mighta firm wish to consider to improve its performance?

Equity ratiois the finance province. Issues to consider are if you are being tooconservative (not employing enough cheap debt)?

For your deliverable:

Include the downloaded industry spreadsheet for the industry you selected.

Identify the firms you selected within the spreadsheet by changing the color of the font for that firm on each tab to red.

Prepare a table that calculates the ROE for each firm using the three components. Make sure each column is labeled. (You should have columns that are labeled ROE, Net Profit Margin, Asset Turnover, Equity Ratio) Create a similar table for the market value measures.

Write a brief paper; about two pages maximum (2 plus/minus a half page). Paper should address the reasons why one firm has a high ROE, why one firm has a low ROE and what could be done to improve the lower performing firm based on ROE (if it is really performing at a lower level). Perform similar contrast and comparisons for the market value ratios.

Be sure to address issues such as marketing, asset utilization, financing and if your chosen firm appears to be under or overvalued.

May 2015