Assignment 1 – Comparing corporations using financial statements
Due: August 30, 2016
Please work on this one other person and turn in one final submission with both names on it. Please submit a copy of the financial statements you use in addition to your calculations and the analysis.
- Select two US companies in the same industry. Do not use financial institutions or companies that have traded publicly for less than three years or have filed or emerged from bankruptcy within the last three years. You might consider using a large and a small company, or an established and a newer company from the same industry, or alternatively, close competitors.
- Obtain the balance sheet and income statement for each two company for the most recent and prior fiscal years.
- Create the common size balance sheets and income statements for each company for the two fiscal years.
- Express the most recent fiscal year statements for each company using the prior fiscal year as the base year.
- Calculate financial ratios for each companies for the two fiscal years as follows:
- net profit margin, return on assets, and one other profitability (or performance) ratio;
- total asset turnover ratio and one other efficiency (asset management or turnover) ratio;
- three leverage (debt or long term solvency) ratios: total debt ratio, equity multiplier, and times interest earned ratio;
- two liquidity (short term solvency) ratios;
- the two market value ratios: price earnings ratio and market book ratio; and
- any other ratios at your discretion that you consider helpful in comparing the quality of the two companies.
- Contrast the most recent year’s return on equity for the two companies using the DuPont system.
For items 7-10, do not look at other analysts’ opinions regarding the two companies. Anyone can locate and repeat another’s conclusions. This assignment is designed to give you an opportunity to identify relevant information, process it in order to reach a conclusion and to express the conclusions and the reasoning leading to it. I don’t expect you to write more than a paragraph or so in response to each of the following but you can write what you feel is needed.
- Using the information generated in items 3-6, contrast the financial strength of the two companies? (You should explain how specific information from 3-6 supports your determination regarding financial strength.)
- Using the information generated in items 3-6, contrast the quality of management for the two companies? (You should explain how specific information from 3-6 indicates management quality.)
- Based on the information generated in items 3-6, which company is better poised to take advantage of future growth opportunities? (You should indicate how specific information from 3-6 supports your determination.)
- Which of the two companies would you recommend to an investor with a 6 month investment horizon? Explain.