ASSIGNMENT
Purpose of Assignment
The purpose of this assignment is to help students gain a better understanding of the financial statements used for corporate financial reporting and the key ratios used to make business decisions.
Assignment Steps
1) Select a Fortune 500 Company from one of the following industries:
• Pharmaceutical
• Energy
• Retail
• Automotive
• Computer Hardware
2) Reviewthe balance sheet and income statement in the company's 2015 Annual Report.
3) Calculate the following ratios using Microsoft Excel:
• Current Ratio
• Quick Ratio
• Debt Equity Ratio
• Inventory Turnover Ratio
• Receivables Turnover Ratio
• Total Assets Turnover Ratio
• Profit Margin (Net Margin) Ratio
• Return on Assets Ratio
4) Analyze in 1,050 words why each ratio is important for financial decision making.
Each type of ratio should have its own section in the paper: Section headings are required by APA.
Look at the ratios and make sure that they're appropriate. For example, a service company (e.g. FedEx, Yahoo) doesn't produce a product, so there is no inventory, thus an inventory turnover ratio would be meaningless, so that is why the list above is restricted. A company with little or no debt would have a debt-to-equity ratio that might not change much from year to year.
Put small tables for each category in the paper and discuss each set.
Like this:
|
Ratios
|
2015
|
|
|
|
X ratio
|
1.6
|
1.6
|
|
y ratio
|
1.94
|
1.94
|
|
z ratio
|
2.55
|
2.55
|
|
|
1.57
|
1.57
|
|
|
1.91
|
1.91
|
Or this:
Liquidity ratios
|
|
2015
|
|
Current ratio
|
Current Assets / Current liabilities
|
1.43
|
|
Quick ratio
|
Current asset - inventories / Current liabilities
|
1.37
|
DO NOT put huge tables in your paper as it is too hard to read and will cause you to lose points.
Here's a list of the ratios from the textbook:
SHORT-TERM SOLVENCY RATIOS
Current ratio = Current assets ÷ Current liabilities
Quick ratio = (Current assets - Inventory) ÷ Current liabilities
Cash ratio = Cash ÷ Current liabilities
FINANCIAL LEVERAGE RATIOS
Total debt ratio = Total debt ÷ Total assets = (Total assets - Total equity) ÷ Total assets
Debt-equity ratio = Total debt ÷ Total equity
Equity multiplier = Total assets ÷ Total equity = 1 + debt-equity ratio
Times interest earned = Earnings before interest and taxes ÷ Interest
Cash coverage = (Earnings before interest and taxes + depreciation + amortization) ÷ Interest
TURNOVER RATIOS
Inventory turnover = Cost of goods sold ÷ Inventory
Days sales in inventory = 365 ÷ Inventory turnover
Receivables turnover = Sales ÷ Receivables
Days' sales in receivables= 365 ÷ Receivables turnover
Total asset turnover = Sales ÷ Total assets
Days in inventory = Days in period ÷ Inventory turnover
PROFITABILITY MEASURES
Profit margin = Net income ÷ Sales
Return on assets = Net income ÷ Total assets
Return on equity = Net income ÷ Total equity
EBITDA margin = EBITDA ÷ Sales
MARKET VALUE RATIOS
Price-to-earnings ratio = Market price per share ÷ Earnings per share
Market-to-book ratio = Market price per share ÷ Book value per share
Market capitalization = Market price per share x Shares Outstanding
Enterprise Value (EV) = Market capitalization + Market value of interest bearing debt - cash
EV Multiple = EV ÷ EBITDA