Ratio Analysis Assignment
Purpose: The purpose of this assignment is to insure that the student has a basic level of skill in strategic
financial ratio analysis. A secondary purpose of this assignment is to help familiarize the
student with library sources of industry financial standards.
Content: This assignment is to be done as one single paper. The overall paper has an introduction, a
body and a conclusion. The body is composed of the analysis of the firm. The overall
conclusion of the paper is a comparative evaluation of the firm to its industry to determine the
overall STRATEGIC financial health of the firm
The content of each analysis is composed of three parts. First, as per the instructions in the
readings, students will calculate financial ratios for each firm. It is not necessary to calculate
every possible ratio for the firm but you must calculate at least four ratios in each of the five
major areas (activity, liquidity, leverage, stock market, and profitability).
Next the student will determine what the industry's standards are for the firm. These are
found by consulting any of the reference books on the subject or by constructing a market
basket of competitors. You will need to create a basket for the stock market ratios in any
case. The two most commonly used books are available on reserve in the library. You have
to ask for the appropriate year for each title. They are not on reserve for this course
specifically. These books are:
Industry Norms and Key Business Ratios (Dun & Bradstreet)
RMA Annual Statement Studies.
You will use the relevant edition (e.g., if available 2004 edition for 2004 data, 2003 edition for
2003 data) for your analyses. There are other sources if you care to use them. In any case,
you will present a table for the firm that shows its ratios and your industry standard. It is not
necessary to repeat the table in the body of your paper. You will describe the differences
between the firm and its industry. Lastly you must explain what being over or under the
industry standard means strategically, operationally or tactically. As an example, if a firm
has a lot more inventory than the industry standard, they may be losing money from the costs
of holding that inventory. Alternatively, if they have too little inventory they may risk stock
outs. REMEMBER THIS PAPER IS TO DEVELOP YOUR SKILLS IN STRATEGIC
FINANCIAL ANALYSIS. DO NOT USE IDEAS FROM OTHERS INCLUDING
PUBLISHED SOURCES. YOU WILL RECEIVE A “0” IF YOU DO.
Length: Although I generally do not like to answer this question since it is sure to be asked, the overall
paper can be done in less than 10 typed, double spaced pages. You need a cover sheet but do
not need a binder.
Backup For further information on financial statement analysis I have put the following books on References reserve: Successful Managerial Control by Ratio Analysis by Tucker, Financial Statement
Analysis, by Foster (with special attention to pages 57-94) and The Analysis of Financial
Statements by Bernstein. The Stickney et. al Financial Statement Analysis Package found on
the web page will be quite helpful.
I have been asked in the past for some clarification on the outline for the ratio project. There are a variety of ways to organize the narrative. Here is a suggested (but not required) outline:
1. Introduce the paper i.e. describe what you are going to do and why, plus describe the industry standards
you used/created and the process you went through to analyze the data.
2. Start with a discussion of the first family of ratios and their general trajectory over time. Compare this
to the industry's trajectory over the same period. Only discuss individual ratios if their trajectory is
different from the family to which you have assigned them. This is what I have been referring to as the
3. Next you may wish to discuss (speculate on) how the firm got to the place it is in for the first family of
ratios. This is the retrospective analysis.
4. After you have done the retrospective analysis, you compare the family to the industry standards. This
is where you discuss whether the family or individual ratios are materially over or under the industry
standard for each year of the analysis. Again discuss individual ratios if their relative position is different
from the family to which you have assigned them. This is the "horizontal" analysis.
5. You now discuss the strategic, operational or tactical implications of the firm's relative position for the
family of ratios. Again discuss individual ratios if their relative position is different from the family to
which you have assigned them. This is the prospective analysis.
6. Repeat for each family of ratios.
7. Conclude the paper with the answer to the questions:
a. What is your judgment of the and likely future general financial
condition of the firm?
b. DO they have or can they get the resources to engage in new