FIN 2000 Final Project Instructions
The purpose of this project is for you group to act as a financial analyst firm and express your opinion about a publicly traded company of your choice for investment purposes. In order to do that, you must analyze the company’s financial statements. You may look at financials from any time period, but I recommend you use financial statements for the Company’s most recent two fiscal years as your main source. Look at the Company’s competitive environment, and how the events in the respective industry and the rest of the world will impact the Company’s financial performance and viability going forward. Remember, the Company’s operational and business results are expressed with financial statements. Consequently, financial information and figures that you will see in front of you happened for a reason, and you need to explain to the best of your ability what those reasons are, and based on the business events and the subsequent figures, your justification to either recommend to invest or not to invest in the stock of this company.
Remember, that all investment decisions are forward looking. Meaning, while you have the financial information as point of reference, you must be able to use the financial information to determine the Company’s financial performance in the future.
Introduction
The first part of your presentation should state if you have decided to recommend investing funds in the Company stock or reject the stock. The investment decision is the first stated major information due to the fact that as an analyst you are preparing a product (report) for an audience, and the audience needs to know the most important information first, the investment decision.
This should be followed by the Company’s general “identification” information: Name, headquarters, year it was founded, most recent stock price, 52 week high/low/ price, number of outstanding shares, market capitalization, number of employees, and other information that you believe is pertinent to your evaluation. You can look at the 10K, annual reports, company website, Yahoo, etc.
Additionally, you need to briefly describe the Company. What does it do? (Don’t spend too much time explaining each line of product). Brief history and major recent events (acquisitions, mergers, change of management, major good or bad news). Use this part to describe the Company’s competition and business environment. What is the competitive environment like? Who are their competitors? What is the company doing to combat competitors? Is the environment favorable (defense contractors during wartime) or unfavorable (homebuilders during a recession)? This is the classic top-down approach to analyzing finance. You start with the big picture (the industry, the environment) and move down to company specific financial information, which are directly or indirectly impacted by big picture events.
Financial Section
The main part of your presentation, the analytical evaluation of the Company, should be divided
into three parts
PROFITABILITY
You will use the income statement as your primary source for this section. Simply tell me how
the company has performed over the years, with emphasis on the last two fiscal years. How
much has total revenue gone up or down the last couple of years? Why do you think this
happened? Remember, a number is just a number; you have to use it as your starting point to
understand the story behind that number. Compare the company’s prior year income statement to
get an idea if things are going up or down. Also compare one major competitor’s performance.
How did your company do in terms of what % of profit they earned versus their main
competitor? I’m playing the role of a top level executive so I don’t need details, I need the major
items of note
Make full use of financial ratios you learned. You can select which financial ratios you want to
present. Explain the underlying reasons behind the trend of numbers. Why did sales go down?
Why did expenses go up? A good starting point is the Management’s Discussion and
Analysis of Financial Condition and Results of Operations in the annual report. This is a
government required section in the annual report, where the management must tell you what has
happened to the company and why. But they are paid to put a good spin on things, so don’t just
take management’s word for it. Do your own research to support your conclusion. Remember,
most of the time you will not be able to find a conclusive answer. Don’t be discouraged. As an
analyst you must come up with a conclusion based on limited information provided. Tell me
why do you think, based on some supporting information, revenue and expenses went up or
down.
CASH FLOW AND LIQUIDITY
Now that you have established the company’s operating performance, move on to the cash flow statement you learned about and figure out how much cash the company operations generated, how much it invested, and how it was financed. I need you to briefly discuss the operating, investing, and financing sections of the company’s cash flow statement. What about free cash flow? Remember, generally the more free cash flow (cash is king!) the more immediate liquidity and financial flexibility. Now look at the company’s overall liquidity position. How much cash does it have? Is it increasing or decreasing? Use ratios like the current ratio, quick ratio, cash ratio. But also take a closer look at those ratios. A current ratio with a lot of cash could be a better alternative than a strong current ratio relying on questionable inventory and accounts receivable. What potential future events could require cash (if you read that the company is going to make acquisitions of $10 million in the next two years, but it has only $2 million in cash on its balance sheet, where will it get the rest of the cash? Is it going to borrow? In that case, is it able to sufficiently repay the debt?)
At the end of the day, the value of any investment is determined by its ability to generate cash. Has your company generated cash and will it continue to generate cash going forward?
CAPITAL STRUCTURE AND FINANCIAL LEVERAGE
Start by telling me how the company raised capital. Is some of it from common stock?
Preferred Stock? Bonds? Likely a combination of all three? Use the company’s balance sheet to describe the different forms of liabilities it uses. Most importantly discuss the company’s debt. Is the debt increasing or decreasing? Does the company have enough operating cash to pay maturing debt (remember, maturing debt is most important, because the same way you need money to pay only the mortgage payment that is due and not your entire mortgage balance, a company is relatively OK as long as it can pay the debt that is due in a particular year rather than its entire debt.) Use the debt ratio to show what portions of assets are financed through debt rather than equity. Use the cash coverage ratio which shows how well the company can generate cash to meet its financial obligations. Does it sound like the company is going to assume more debt in the future? (You have to read between the lines. A company that hints that it’s going to buy other companies but doesn’t have the cash on its balance sheet is indirectly telling you that it will borrow more money or raise equity from investors to finance such spending) More debt could mean less cash for investors, which could ultimately impact the stock price.
Tables
In addition to the information presented above, you will provide the most important financial numbers from the last two years. This could be information from the main financial statements.
From Income Statement you could include revenue, gross profit, operating profit, interest expense, EBITDA, and net income. From Statement of Cash Flows you include operating cash flow, investing cash flow, financing cash flow, and change in cash. From the Balance Sheet, assets, cash and cash equivalents, liabilities, total debt, shareholder’s equity. If you feel other numbers are significant for your particular company, feel free to include them as well. Provide a summary of relevant financial ratios for the last two fiscal years that you have calculated for the purpose of the project.
Conclusion
The purpose is to summarize all of your findings. You can include a summary of what they do, its income performance, its cash flow ability, its overall financial position (balance sheet). Also include non-financial factors that you think impacts the assigned investment decision. Conclude with your final recommendation. If the company is rated by one of the major risk rating agencies, Standard and Poor’s, Moody’s, or Fitch Ratings, include the rating that has been assigned by those parties. The last slide should list your references where you retrieved the financial statements.
The purpose of the conclusion is so the audience can quickly understand what your company does, what its financial condition is, and what investment decision has the analyst assigned for the company.