Ratio Analysis Assignment

By Christine Lopez,2015-03-04 01:03
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Ratio Analysis Assignment

    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




    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.

    Project Outline

    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

    vertical analysis.

    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

     strategic initiatives?

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