1. Choose one public company in the U.S. that you are interested in and find the industry peer that closely resembles the target company’s line of business.
2. Find the latest five years’ annual reports of the firm. You should go to the SEC website to search for 10-k filings instead of gathering financial information from some third- party site.
3. Compile comparative financial statements in the latest five years. Apply year-to-year change analysis on essential items of the financial statements. Construct the vertical common-size income statement and common-size balance sheet by expressing each item in the financial statements as a percentage of a relevant total within the same year. Explain the change of trend in your analysis.
4. Calculate financial ratios for the target firm and the peer using the comparative financial statements. The ratios should be grouped into five categories: Liquidity, Profitability, Efficiency, Long-term solvency, and Investor-oriented ratios. These ratios will provide the basis for analyzing the financial performance of the company. Based on the financial performance, identify the issues related to the target company’s business operation, and make investment recommendations from long-term investors’ perspective.
5. Each student needs to write a report to summarize your findings. Key discussion items could include but not limited to the following points:
a) a. Summary of the company. Write a brief description of the company that you are analyzing. Identify the company’s strengths, threats, and risk factors.
b) Use the year-to-year change analysis to identify the trend and kinks over time.
c) Refer to the vertical common-size in come statement and common-size
a. balance sheet and compare each item change over time. Read the relevant
footnotes and find out the economic reasons that lead to the change.
d) Financial ratio analysis. Explain the trend of the ratio change by referring to the corporate decisions in the footnotes. Comment on the business issues implied by the change and make suggestions to managers. (Don’t just state the calculation formula; tell the story behind the ratios). Compute the same ratios on an industry peer and use the industry peer as the benchmark for comparison.
e) Explain the change of ROE in the DuPont analysis format. The improvement or deterioration of ROE may be caused by financial leverage, sales efficiency, and/or profitability. Which one is the main reason for the change? You can use your analysis as a reason for the buy/not buy decision.
f) (bonus points) Apply Altman’s multivariate model on the targeted company and benchmark to predict bankruptcy.
g) Recent news. The news could be economic, industry, or company-specific. Illustrate how the news might affect your decision to invest in the company. Examples of company-specific news include recent acquisitions, management change, earnings reports, lawsuits, or significant changes in operations, etc.
h) Recommendation to Buy or Not to Buy. Form an investment recommendation based on the above analysis.
i) In the conclusion of your report, please list the operational issues identified by referring to your analysis results. Please state your recommendation clearly with relevant reasons. The reason should be consistent with your analysis results. Be sure to check the grammar and spelling in your report, be sure to write your name and student ID on the header.
6. What should be included in your submission? I will create a submission link on the course website. You need to include the following in your submission:
a) project reporting word or pdf format.
b) Excel spreadsheet that includes the original financial statements, horizontal
a. and vertical analysis, common-size income statement and balance sheet, financial ratios calculated in five categories, Dupont Analysis results, Bankruptcy analysis results using Altman’s model (bonus). Spreadsheet results are what you used in the report.
Finally, have fun in doing your term project!
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