MT217M2-2: Analyze financial statements ratios used to measure the financial performance of a business entity.
PC-1.1: Engage in a team setting with professional integrity and respect.
Financial statement analysis is the process of analyzing a company’s financial statements to make better economic decisions. The process for financial statement analysis includes specific techniques for evaluating risks, performance, and future prospects of an organization.
This assessment is separated into three parts and based on a fictitious company. In Part 1, you will use the Balance Sheet and Income Statement to calculate the five categories of ratios. You will calculate and explain the significance of liquidity, activity, financing, profitability, and market value, and provide a year-to-year comparison of assessed financial trends. In Part 2, you will compose an analytical study to assist the CEO of your company to determine if ABC Company, a technology company dealing with software and hardware, would be a good investment as an acquisition.
Part 1
You will use this Excel workbook® with two worksheets to assist you in completing this part of the assessment. The first worksheet is the Balance Sheet and Income Statement for ABC Company. The second worksheet contains a breakdown of categories of ratios where you will complete the calculations for each ratio. You will also enter the formula written out as to what information you have used to do the calculations.
You are going to use the five classifications of financial ratios to assess the financial performance of ABC Company.
Instructions
You will present a definition of the classification by citing the course text and other scholarly sources.
Your paper should include a measure of, and analysis of, financial outcomes based on the ratios for each financial ratio classification (i.e., the liquidity classifications of ratios are based upon the quick and current ratio outcomes).
You will calculate ratios for each classification for the 3 years of data (i.e., the current ratio may have been 1.5 the first year, 1.35 the second year, and .75 in the most recent year). It is based on these results that you will measure financial performance, or trends, from one year to the next. It is imperative that the ratios numbers, and quantitative outcomes, support your analysis.
- Using the data from the Income Statement and Balance Sheet, provide the correct calculation of the liquidity ratios and an assessment of the company’s ability to maintain liquidity and the management of current assets and current liabilities. Include the proper assessment of outcomes as positive or negative trends when all ratio outcomes are factored as a group.
Liquidity Ratios
- Current Ratio
- Quick Ratio
- Using the data from the Income Statement and Balance Sheet, provide the correct calculation of the activity ratios and an assessment of the company’s ability to maintain liquidity. Include the proper assessment of outcomes as positive or negative trends when all four ratio outcomes are factored as a group.
Activity Ratios
- Inventory Turnover
- Accounts Receivables Turnover
- Total Asset Turnover
- Average Collection Period
- Using the data from the Income Statement and Balance Sheet, provide the correct calculation of the financing ratios. Include the proper assessment of outcomes as positive or negative trends when all three ratio outcomes are factored as a group.
Financing Ratios
- Debt Ratio
- Debt-to-Equity Ratio
- Times Interest Earned Ratio
- Using the data from the price per share data, the Income Statement, and the Balance Sheet, provide the correct calculation for the market value ratios below.
Market Value Ratios
- Earnings per Share (EPS)
- Price Earnings (PE)
- Using the data from the Income Statement and Balance Sheet, provide the correct calculation of these four profitability ratios and an assessment of the company’s ability to maintain, if not improve, profitability based on the amounts of equity, assets, and levels of profits from sales. Include the proper assessment of outcomes as positive or negative trends when all four ratio outcomes are factored as a group.
Profitability Ratios
- Return on Equity (ROE)
- Return on Assets (ROA)
- Net Profit Margin
- Operating Profit Margin
Part 2
In this part of your assessment, you will compose an analytical study reporting your results from Part 1. The CEO of your company is forming a task force to review the financials and present a review for the acquisition of ABC Company. Based on ABC’s previous 3 years of financials, determine if this would be a good acquisition. You must form the task force to complete the task.
The CEO would like most of the departments to participate in the process. Using each department’s area of expertise, what information would each of the following departments contribute to the final decision? Provide a minimum one-paragraph response for each department.
- Finance Department
- Sales Department
- Marketing Department
- Human Resources
- Legal Department
Part 3
After you have provided their input on the effect the acquisition will have on their department, perform an overall analysis to explain your recommendation to the CEO. Your analysis should include the following:
- Explain how the company is trending based on the year-over-year ratios.
- Compare the company to the industry average in Appendix A in the Excel workbook in areas of profitability, management effectiveness, and efficiency.
- Based on the above, summarize the pros and cons of ABC Company using both the year-over-year ratio analysis from Part 1 and the industry average comparisons from Part 3.
- Provide your final recommendation as to whether or not the CEO should invest in ABC Company.
Your paper should follow this format:
- Title page
- Introduction: the purpose of the analysis
- Analysis with subheadings of Part 1, Part 2, and Part 3
- Recommendation (overall conclusion)
- Reference page
Book APA format:
Titman, S., Keown, A. J., & Martin, J. D. (2017). Financial Management: Principles and Applications (13th ed.). Pearson Education (US). https://purdueuniversityglobal.vitalsource.com/books/9780134418001
Read the following chapters from your textbook:
- Chapter 3: “Understanding Financial Statements”
- Chapter 4: “Financial Analysis: Sizing Up Firm Performance”
Free access to book: https://b-ok.cc/book/5441376/660095
- Your paper must be a minimum 500-word informative essay (2–3 pages) in a Microsoft Word document, in APA format, and must include a title page and reference page.
- All Parts of the assessment must include correct grammar, punctuation, and spelling.
- Your paper must be written in Standard English and demonstrate exceptional content, organization, style, grammar, and mechanics.
- Your paper should provide a clearly established and sustained viewpoint and purpose.
- Your writing should be well ordered, logical, and unified, as well as original and insightful.
- You should paraphrase the material and use in-text citations to justify your discussion. Avoid using quotations. Ensure you are properly paraphrasing from your sources. For a refresher on paraphrasing, view this short video on paraphrasing and explore the additional resources prior to starting your assessment. You can access tutorials, how-to videos, tutoring services, and more by visiting the Academic Success Center.
- You must use at least one scholarly, high-quality, and current Purdue Global Library source in addition to your course materials. Peer-reviewed academic articles, articles published in journals, textbooks, and library resources found in the “ProQuest ABI/Inform Collection” database from the Library are examples of high-quality resources.
- Respond to the questions in a thorough manner, providing specific examples of concepts, topics, definitions, and other elements asked for in the questions. Your paper should be highly organized, logical, and focused.
- Be sure to include references for all sources and cite them using in-text citations where appropriate. Use your textbook, the Library, and/or the Internet for research. Your sources and content should follow current APA citation style. Review the writing resources for APA formatting and citation found in Academic Tools. Additional writing resources can be found within the Academic Success Center.
- Your submission should:
- include a title page;
- be double-spaced;
- be typed in Times New Roman, 12-point font; and
- be free of spelling or punctuation errors.
