Posted: December 9th, 2014

Financial Statement Analysis Mini-Project

Order Description

The financial analysis project is designed to develop your ability to (1) understand and analyze
published financial reports and (2) make a recommendation to investors regarding the financial
condition of a public company.

This project can be completed entirely in Microsoft Excel. You should use Mergent Online to download
the appropriate financial statements, and can include those statements in the Excel file with cell
references in the formulas to guard against mathematical errors.

It is important to fully address the question being asked. When answering the questions, make sure
to double-check your calculations. Be sure to include your results as well as a detailed
explanation/interpretation of the information.

Any use of outside reference materials should be cited.

The bulk of your grade will be based on your ability to perform the requested analyses and provide an
accurate interpretation of the results. Financial analysis includes not just the ability to obtain the
correct results, but also the ability to describe and interpret what the results mean in terms of
increasing the understanding of the available data.

Primary: Starbucks (SBUX) (PICK A DIFFERENT COMPANY, THIS IS JUST AN EXAMPLE)

Competitor: Select a competitor from those identified by Mergent Online

1. Calculate the following ratios needed to assess liquidity and interpret the results. This should
include the last 3 years of ratios for the company and the last 3 years of ratios for the
competitor. What trends are there? (approx. 1/2 page single spaced 12 pt. in Word doc)

a. Current Ratio
b. Acid-Test (Quick) Ratio
c. Receivables Turnover
d. Inventory Turnover
e. Asset Turnover

2. Calculate the following ratios needed to assess long-term debt-paying ability and interpret the
results. This should include the last 3 years of ratios for the company and the last 3 years of
ratios for the competitor. What trends are there? (approx. 1/2 page single spaced 12 pt. in Word doc)

a. Times Interest Earned
b. Debt to Total Assets Ratio
c. Book Value per Share

3. Calculate the following ratios needed to assess profitability and interpret the results. This
should include the last 3 years of ratios for the company and the last 3 years of ratios for the
competitor. What trends are there? (approx. 1/2 page single spaced 12 pt. in Word doc)

a. Profit Margin on Sales
b. Rate of Return on Assets
c. Rate of Return on Common Stock Equity
d. Earnings per Share
e. Payout Ratio

4. Which company would you invest in? What are the reasons for your decisions? This should be
based on financial analysis and significant facts. (approx. 1 page single spaced 12 pt. in Word doc)

Financial Statement Analysis Mini-Project

Any use of outside reference materials should be cited.

Primary: Starbucks (SBUX) (PICK A DIFFERENT COMPANY, THIS IS JUST AN EXAMPLE)

Competitor: Select a competitor from those identified by Mergent Online

a. Current Ratio
b. Acid-Test (Quick) Ratio
c. Receivables Turnover
d. Inventory Turnover
e. Asset Turnover

a. Times Interest Earned
b. Debt to Total Assets Ratio
c. Book Value per Share

a. Profit Margin on Sales
b. Rate of Return on Assets
c. Rate of Return on Common Stock Equity
d. Earnings per Share
e. Payout Ratio

4. Which company would you invest in? What are the reasons for your decisions? This should be
based on financial analysis and significant facts. (approx. 1 page single spaced 12 pt. in Word doc)

How to use Mergent Online to find public firms’ financial data

Step 1: Go to Library home page at http://vcuhvlibrary.uhv.edu/

Step 2: Select Mergent Online from the All Database list

Step 3: Select ‘Business’ Service Area

Step 4: Click on the “Reference Materials” tab

Step 5: Select “Mergent Online”

Step 6: Select “Ticker Symbol” and type in “SBUX” in the
Search box

Step 7: Select “Starbucks.”

Step 8: Select “Company financials”

Step 9: Change the period to “5 years/quarters” for both Balance
Sheet and Income Statement. (note you’re only using the 3 most recent years but may need the last 4 years for some calculations – pulling this now saves time later)

Step 10: Download both by clicking on the “Download MS Excel”

Step 11: Select “Competitors”

Step 12: Repeat Steps 6-9 for the competitor.

Financial Statement Analysis – Financial Ratios
Introduction:
Many tools are available for managers, investors, and analysts to use when analyzing a company. Up to this point we have seen how a company’s basic financial

statements are constructed and what type of information each presents. We will now evaluate how end users, specifically financial analysts, can use the information

contained in the statements for various purposes.
Why Use Ratios:
• Some of the most valuable tools available for analysis are financial ratios.
• Ratios allow analysts, investors, and managers to get a better overall view of a firm’s financial health as opposed to solely looking at raw financial data

within the statements.
• Ratios are superior to many forms of comparison because they are a more accurate measure of relative size. This allows us to measure performance over periods

of time more easily and accurately than changes in dollar amounts.
Who Uses Ratios:
• Internal users can use ratios for planning and analysis, goal setting, and management performance.
• External users use ratios to make decisions regarding issuance of credit, monitoring of financial performance, forecasting financial performance, and to make

investment decisions.
Five Categories of Financial Ratios:
1. Liquidity Ratios: Describe the ability of a firm to meet its short-term obligations. They compare current assets to current liabilities.
2. Efficiency Ratios: Describe how well the firm is using its investment in various types of assets to produce sales. They may also be called asset management

ratios.
3. Leverage Ratios: disclose the degree to which debt has been used to finance the firm’s purchase of assets. These ratios are also known as debt management

ratios.
4. Coverage Ratios: are similar to liquidity ratios in that they describe the firm’s ability to pay certain expenses.
5. Profitability Ratios: provide indications of how profitable a firm has been over a period of time. Tells us how much money we are making (profit not

revenue)!!!
LIQUIDITY RATIOS:
Liquidity is the rate at which an asset can be turned into cash without large discounts or concessions to its value. Some assets such as receivables can be easily

turned into cash without large discounts. However, other assets such as buildings and equipment can be turned into cash quickly but only if large concessions are made

or big discounts given. Receivables are thus more liquid than buildings and equipment. A firm with more liquid assets will be more able to meet its maturing

financial obligations.
The Current Ratio
•   A firm’s current assets are generally converted to cash which is used to satisfy its current liabilities.
Current Ratio = Current Assets / Current Liabilities
•   The higher the current ratio the higher the likelihood that a firm will be able to satisfy its financial obligations.
•   From the creditor’s perspective, the higher the ratio, the more likely a prospective customer is to pay its bills.
•   Since current assets typically have a lower expected return than fixed assets, shareholders are interested in a minimum investment in current assets.
The Quick Ratio (Acid-Test):
•   Inventories are typically the least liquid (cash conversion) of a company’s current assets.
•   The quick ratio is a measurement of liquidity that excludes inventories.
Quick Ratio = (Current Assets – Current Liabilities) / Current Liabilities
•   The quick ratio will always be less than the current ratio.
•   Please note that a ratio that is too low relative to the current ratio may be a good indicator that inventories are higher than they should be.

EFFICIENCY RATIOS:
Accounts Receivable Turnover Ratio:
•   The accounts receivable turnover ratio provides us with information about a company’s ability to manage its accounts receivables.
Accounts Receivable Turnover Ratio = Credit Sales / Accounts Receivable
•   The corresponding answer would be read as X.XX Times meaning that a firm generated X.XX dollars in sales for each dollar invested in accounts receivable.
•   A higher ratio is typically better but too high of a ratio may indicate that the company is losing sales due to their denying of credit to credit-worthy

customers.
•   A ratio that is too low suggests that the company is having trouble collecting on its sales.
Inventory Turnover:
•   This ratio measures the number of dollars of sales that are created per dollar of inventory.
•   To simplify, it is a measure of the number of times a company replaces its inventories during a year.
Inventory Turnover Ratio = COGS / Inventory = X.XX Times
•   It is also common to use sales in the numerator since the only difference between sales and COGS is a markup.
•   Average Inventories is also used to calculate the ratio.
•   It is important to ensure you are comparing “apples to apples” when calculating ratios.
•   Typically, high inventory turnover is considered to be good because it means that the opportunity costs associated with holding inventory is low.
Total Asset Turnover Ratio:
This ratio presents us with an idea of how effectively a company is using all of its assets to generate sales.
Total Asset Turnover = Sales/ Total Assets
•   Higher turnover ratios indicate more efficient use of the assets and are preferable to low ratios.
•   Some industries will have lower turnover ratios than others.

LEVERAGE RATIOS:
•   Leverage ratios describe the degree to which a company uses debt in its capital structure.
•   The amount of leverage depends on the amount of debt a company uses to finance its operation.
•   A company that uses a lot of debt is said to be “highly leveraged.”
•   This information is very important to creditors. A firm with too much debt might be seen as a risk and therefore will have difficulty repaying loans.
Total Debt Ratio
The total debt ratio measures the total amount of debt that a company uses to finance its assets.
Total Debt Ratio = Total Debt / Total Assets = (Total Assets – Total Equity) / Total Assets
Book Value Per Share Ratio:
•   Book value per share is a market value financial ratio.
•   The purpose of calculating book value per share is to relate shareholder’s equity to the number of shares of common stock outstanding.
•   Since the number of shares of preferred stock are not considered, this gives a more “real” value to the common shares outstanding.
Book Value Per Share = (Shareholder’s Equity – Preferred Stock) / Average Outstanding Common Stock
•   The market value of stock and the book value of stock may be very different.
•   The book value is essentially an accounting value.
•   If market value is much higher than book value, the financial markets are likely experiencing a bull market.
•   If the values are closer together, the financial markets may be in a bear market.
COVERAGE RATIOS:
•   Coverage ratios are similar to liquidity ratios in that they illustrate the quantity of funds available to “cover” certain expenses.
Times Interest Earned Ratio:
•   The times interest earned ratio measures the ability of a company to pay its interest obligations by comparing earnings before interest and taxes (EBIT) to

interest expense.
Times Interest Earned Ratio = EBIT / Interest Expense
PROFITABILITY RATIOS:
•   Managers, investors, and analysts are always interested in the profitability of the company they work for, own, or cover.
•   While there are many ways to measure profits, profitability ratios provide a simple way to compare profits to previous periods or firms.
•   WITHOUT EXCEPTION, higher profitability ratios are preferred.
Gross Profit Margin:
•   The gross profit margin measures a firm’s gross profit relative to its sales.
•   This ratio tells us the amount of money that is available to pay the firm’s expenses above its cost of sales.
Gross Profit Margin = Gross Profit / Sales
Return on Assets (ROA):
•   Return on assets measures the financial returns generated by the investements of the shareholders.
ROA = Net Income / Total Assets
Return on Equity (ROE):
•   ROE calculates the rate of return on shareholder’s invested funds.
•   Note: if a firm uses no debt, its ROE will be the same as its ROA.
•   The more debt a company uses, the higher its ROE will be relative to its ROA.
ROE = Net Income / Total Equity

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