Ratio Analysis

OVERVIEW: In 3–6 pages, complete a ratio analysis using a provided balance sheet and income statement, specify how you would analyze a potential investment, and describe how you would forecast a company’s potential success.

An investment analysis has two fundamental components: 1) A financial analysis, such as reviewing current financial ratios within the company, and 2) a non-financial analysis, which is reviewing a company’s strategic vision, employee satisfaction, et cetera. The first two parts of your assessment provide an opportunity for you to demonstrate both of these types of analyses.

The goal of forecasting the performance of a company is to estimate the financial performance of a company over a selected period of years. When forecasting a company’s performance, similar to an investment analysis, you look at both financial and non-financial factors. This is the focus of the last part of your assessment.

RESOURCES:

• Brigham, E. F., & Houston, J. F. (2013). Fundamentals of financial management (13th ed.). Mason, OH: South-Western Cengage Learning.
• de Rezende, F. C. (2011). The structure and the evolution of the U.S. financial system, 1945–1986. International Journal of Political Economy, 40(2), 21–44.
• Hall, R. E. (2010). Why does the economy fall to pieces after a financial crisis? Journal of Economic Perspectives, 24(4), 3–20.
• Sherman, E. H. (2011). Finance and accounting for nonfinancial managers (3rd ed.). New York, NY: Amacom.
• Fight, A. (2005). Cash flow forecasting. Jordan Hill, GBR: Butterworth-Heinemann.
• Downes, J., & Goodman, J. E. (2014). Dictionary of finance and investment terms (9th ed.). Hauppague, NY: Barron’s.

INSTRUCTIONS:

Combine the following three parts into one document.

Part 1. Ratio Analysis (1–2 pages)

Using the XYZ Balance Sheet and Income Statement provided and the table provided below, complete the following for XYZ Inc.:

• Calculate the indicated ratios for XYZ.
• Construct the DuPont equation for both XYZ and the industry.
• Use your analysis to outline XYZ’s strengths and weaknesses.
• Say XYZ had doubled its sales as well as its inventories and common equity during 2013. Do you think this would this affect the validity of your ratio analysis? No calculations are necessary.

Ratio	XYZ Inc.	Industry Average
Current		2.0x
Quick		1.3x
Days sales outstanding		35 days
Inventory turnover		6.7x
Total assets turnover		3.0x
Profit margin		1.2%
ROA		3.6%
ROE		9.0%

Part 2. Investment Analysis (1–2 pages)

For this part of the assessment, imagine that you are looking into investing in a manufacturing company, such as a car company or a steel company. Your goal is to create a plan for determining the potential strength of an investment in the company (investment analysis) and determining how the company might perform over a selected period of years (forecast).

After considering a potential investment in this manufacturing company, address the following:

• What are some of the qualitative factors that must be considered when selecting a company in which to invest?
• What financial ratios would you examine, and why?
• What non-financial factors would you examine, and why?

• Use research from at least two references to support your ideas.

Part 3. Forecast (1–2 pages)

Using the same hypothetical manufacturing company described above, address the following questions related to forecasting the performance of the company:

• How would you forecast revenue, profitability, and asset management, such as inventory control and accounts receivable, for a hypothetical manufacturing company?
• What ratios would you analyze?
• What techniques would you use? Why?
• What non-financial factors would be important in your analysis?

Use research from at least two references to support your ideas.

Additional Requirements

• Length: Your document should include 3–6 typed, double-spaced pages to cover all of the parts of the assessment. In addition, include a title page and references page.
• Written communication: Written communication should be free of errors that detract from the overall message.
• Style and Formatting: Apply APA style and formatting to cite your references.
• Resources: You must use at least four references, at least two references supporting Part 2 and two references supporting Part 3.
• Font and font size: Times New Roman, 12 point.