The purpose of this assignment is to evaluate the financial health of a publicly traded company, assess whether the company is worth investing in, and provide recommendations that can help increase firm value.
This assignment will help you practice the following skills:
- Accessing and collecting data from secondary sources
- Synthesizing and organizing information
- Interpreting financial data
- Presenting your findings in a clear and organized way
This assignment will help you apply the following important content knowledge in the discipline:
- Using ratio analysis and financials to evaluate the financial health of a firm
- Determining a company’s cost of capital
- Analyzing a company’s debt and payout policies
- Linking your analysis to the information provided in your PESTEL analysis, news stories and annual report
- Formulating an investment decision and rationale based on your findings
- Using your PESTEL analysis, ratio and financials analysis as well as a SWOT analysis to provide at least 3 recommendations to help the firm to increase value in the future
You are expected to create narrated PowerPoint presentations where you analyze a company’s financial health and provide recommendations to improve performance. The following instructions serve as general guidelines to help you conduct your project. Feel free to add other information that you see fit.
1) The instructor will assign a company that you will study. Go to the company’s website, Mergent Online or www.sec.gov and download the company’s latest 10k report. Use it to describe the company, its history, its lines of business, where it operates, etc.
2) Evaluate the environment the company operates in
a. Identify the sector and industry the company operates in
b. Use industry reports to identify the different factors that affect the
company’s business environment (PESTEL analysis).
Industry reports are available on Mergent Online, Business Source Complete database, and the ABI/INFORM database. These databases are provided through the VWU library. The instructions document to access these databases to get industry reports is listed on Blackboard
i. Political and legal factors that affect the business: laws, regulations, government policies, etc.
ii. Economic factors that affect the business: interest rates, exchange rate, consumer spending, unemployment rate, etc.
iii. Social factors that affect the business: consumer trends, demographics, social trends, cultural trends, etc.
iv. Technological factors that affect the business: introduction of new technology, new trends in technology that can either help or hurt your business
v. Environmental factors that affect the business
3) Description of financials:
Go to finance.yahoo.com and look up your company. Follow the links to answer the following questions:
- What is the most recent stock price listed for your company?
- What is the market value of equity, or market capitalization?
- How many shares of stock does your company have outstanding?
- What is the most recent annual dividend?
4) Conduct Ratio Analysis:
a. Identify your company’s top three competitors
b. Using Mergent Online (database provided by the library), look up your company’s ratios as well the ratios of its top 3 competitors. Use the video link provided on Blackboard to help you navigate Mergent Online.
c. Evaluate short term solvency and liquidity (current ratio and quick ratio) over the past 5 years and explain how the company is doing compared to its top 3 competitors. Use graphs and ratio interpretations.
d. Evaluate Long-term solvency (Long Term debt to Equity ratio and Total Debt to Equity Ratio) over the past 5 years and explain how the company is doing compared to its top 3 competitors. Use graphs and ratio interpretations.
e. Evaluate the company’s ability to cover its interest payments (Times interest earned ratio (called Interest coverage in Mergent Online) over the past 5 years and explain how the company is doing compared to its top 3 competitors. Use graphs and ratio interpretations.
f. Evaluate asset management (inventory turnover, days sales in inventory, fixed assets turnover (called Net PPE turnover in Mergent Online), total asset turnover) over the past 5 years and explain how the company is doing compared to its top 3 competitors. Use graphs and ratio interpretations.
g. Evaluate Profitability measures (profit margin, return on assets, return on equity) over the past 5 years and explain how the company is doing compared to its top 3 competitors. Use graphs and ratio interpretations.
h. Using yahoo.finance.com, evaluate the most recent available market value measures (trailing and forward price to earnings ratio (P/E), price to sales ratio (P/S), market to book ratio (called price to book or P/B in Yahoo Finance). Compare the company’s most recent ratios to its top 3 competitors and explain how the company is doing. Use graphs and ratio interpretations.
i. Conduct a DuPont Identity analysis on the firm and its other 3 competitors: ROE= Profit Margin * Total Asset Turnover * Equity Multiplier
Compare and contrast the source of ROE for your firm and for the three competitors. Can you identify your company’s source of advantage or disadvantage?
5) Using yahoo finance, obtain the company’s degree of systematic risk (beta)
a. Interpret the company’s beta. What does this say about the degree of the company’s systematic risk?
b. What are the company’s products? What is the company’s level of fixed assets compared to the industry and the market? Does this intuitively explain the company’s beta?
6) Determine the company’s required rate of return:
a. What is the company’s cost of equity?
b. What is the company’s cost of debt?
c. What is the company’s overall weighted average cost of capital?
d. What are the projects that the company has announced to undertake in the future?
e. Are these projects in the company’s same line of business?
f. Is the weighted average cost of capital you calculated relevant in
evaluating the company’s future projects?
7) Examine the company’s capital structure and whether it is overleveraged or
a. What are the different types of financing that the company has?
b. How much debt and equity (common and preferred) that the company has?
c. Does this company seem overleveraged or underleveraged?
8) Examine the company’s dividend policy and whether it should pay more or less
a. Who are the main investors that own the company’s stock (pension funds,
individuals, firms, etc.)?
b. How does the company return cash to shareholders? Through dividends or repurchases or both?
c. How much did the company return over the past 5 years?
d. How does the company’s dividend policy to compare to its close 3
e. Given the company’s level of cash holding, do you recommend the
company return more or less to shareholders.
9) Conduct a SWOT analysis:
a. Identify the company’s internal Strengths and Weaknesses and external Opportunities and Threats.
b. Describe how the company can use its strengths to seize the opportunities available.
c. Describe how the company can improve on its weaknesses.
d. Describe what the company can do to deal with the external threats
10) Based on your understanding of the company’s financial health and financial
a. Would you currently invest your money in the company? Why and why not?
b. Whether you are investing or not, what do you suggest that the company does to increase its value in the future? Provide and explain at least 3 recommendations.
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