Latrobe University
FIN5FSA: Financial Statement Analysis
Semester 1, 2017
Assignment Instructions Updated 8 April 2017 with additions marked in blue highlighter.
Group AssignmentOperating and Financial health check of a company
This assignment is an integral part of the learning conducted in this course. It will harness key capabilities for successfullyextracting, managing, understanding & analyzing financial statement information. It is also designed to enhance the Graduate Capabilities (GCs) of cognitive, analytical and communication skills as well as teamwork.
Detailed Instructions:
You will be allocated into a team of 2 by the lecturer by use of name alphabetical order (inside your tutorial groups existing 10 March). Some limited swapping of members of teams will be approved by lecturer where all parties to a swap completely agree.
Your team will be allocated a companycurrently trading in on the ASX.The first task will be to collect the
last 6 annual financial reports and collate in Excel datarelating to income statement, balance sheet, cash flow statement and ratios. You can get the data through DataAnalysis Premium.
Steps to be followed:
1. Go to www.latrobe.edu.auà Click Library à Click Database à Click on D
2. Click Data Analysis PremiumàClick I Agree
3. Provide your student ID and password and you will be taken to a new website.
7. You can also click annual report. Then you can see the annual reports in PDF format.
8. Download the annual report to have a cross check. Sometimes the data downloaded in spreadsheet might be different and if so, take the value in the Annual Report as the correct value. Sometimes, the values of a particular variable may be missing in the downloaded data. If that is the case you can look for it in the annual report e.g. in the notes to the financial report.
9. Download the annual report and prepare the data set.
Students should prepare the data in panel format in Excel (see below) e.g.
|
Company |
Financial Year |
Total Assets |
Total Equity |
Total L.D. Debt |
Revenue |
|
|
|
|
|
|
|
|
Virgin |
2011 |
Figures |
Figures |
Figures |
Figures |
|
Virgin |
2012 |
Figures |
Figures |
Figures |
Figures |
|
Virgin |
2013 |
Figures |
Figures |
Figures |
Figures |
|
Virgin |
2014 |
Figures |
Figures |
Figures |
Figures |
|
Virgin |
2015 |
Figures |
Figures |
Figures |
Figures |
|
Virgin |
2016 |
Figures |
Figures |
Figures |
Figures |
Submission Details
Items to be submitted:In addition to the Excel file from 9 above, you are to submit asuccinct 2000 word operating and financial health check of your firm that covers:
a) Company background and mission
b) Common Size and Horizontal analysis
c) Cash Flow analysis
d) Liquidity analysis
e) Income analysis
f) Solvency Analysis #1: Capital Structure analysis, including an analysis of Debt Ratios.
g) Solvency analysis #2: Compilation of key coverage ratios.
h) Growth and Risk Analysis
i) Some concluding commentary on the company and maybe its prospects for growth, prospects as a takeover target, high risk of failure or whatever you see. Do not be afraid to track the share price and see if you can use that to understand where the company has come from and where the market thinks it might be going. You may want to even come up with a first thought on whether an investor should consider buying the stock, selling or holding the stock – without getting very technical (we leave that to FIN5EQS). You may want to project the next annual income statement and balance sheet (but not obligatory - see notes below)
Further detail on the above elements is presented below
(b)
Common size & horizontal analysis of key financial statements. Various types of trend, bar &pie charts can be useful in the presentation of the analyzed results in your assessment submission. Students are expected to make very brief but pertinent comments regarding the findings. Comments could be related to the causes and significance of the increase or decrease of important variables such as PPE assets, intangibles, sales, EBIT, net income, debt, equity and cost of goods sold.
(c)
Cash Flow analysis. You would need to provide some commentary around what trends are emerging in the part of the Cash Flow Statement called
cash flow from operations as a lot of the good news and bad news of a company is revealed there. Investors often look at this section before they bother with an income statement.
If you wanted to take cash flow analysis further, have a look at the appendix to this document. In the interest of time I believe you do not need to do that. If you wish to proceed read chapter 6 and you will see that the 2 most important numbers used in valuing companies are FCFF and FCFE. You will not be doing a valuation but in this unit you are expected to have an appreciation of these 2 key numbers, at least how they have been tracking historically.You will not be marked down if you leave FCFF and FCFE calculations/exploration out of this assignment.
(d) Liquidity Analysis. This would entail as a minimum a current ratio and a liquid ratio together with relevant commentary on receivables and payables and stock management, etc.
(e) Income Analysis. This would have to includean EBIT margin analysis and possibly a gross profit margin analysis (retailers, wholesalers and manufactures only) to see where these are trending. If a company’s EBIT Margin is volatile then you may want to look at that further from a risk point of view. See “h” below. EBIT Margin analysis really is an analysis of the operational profit result before we “taint” it with tax and financing considerations. You then would be advised to move to net income analysis including EPS. You would also be advised to incorporate ROA analysis and EBIT ROA (what the Americans call BEP – Basic Earnings Power). ROA is NI/TA. EBIT ROA is EBIT/TA. TA is total assets. There would also be a case for running ROE, ROCE and ROIC. ROCE andROIC would be the more appropriate analysis to use than ROE if your company is in a capital intensive industryand you wanted to concentrate on operational performance but you should not just limit your use of ROCE and ROIC to capital intensive firms. ROIC is calculated in Lecture 4 (Slides 68 and 69) and you can see that Operating Income (or EBIT, if it is being used as the proxy for Operating Income) has been taxed. That is the traditional way of doing it. Why ROIC can be a good measure for you to look at for most companies is that it introduces you to the notion of Value Add. If ROIC exceeds WACC then we say the company’s activities and projects are adding value. In this unit the appropriate WACC calculation to compare it against is Wd(Cd)((1-Tc) + We(Ce) where Wd is weight of debt, Cd is cost of debt, Tc is the company tax rate, We is the weight of equity and Ce is the cost of equity. I know that in a dividend imputation county like Australia we would probably adjust the WACC formula to take account of imputation but dividend imputation is beyond the scope of this unit so if you are calculating WACC just use the classical formula I have given you here.
(f) Capital Structure Analysis. This is all about ascertaining the level to which the company uses financial leverageto finance its operations and activities. Financial Leverage involves issuing bonds and other forms of debt as well as issuing hybrid instruments such as preference shares and convertible notes. It also involves leasing assets rather than buying. We typically use a series of ratios to examine capital structure. A selection is presented below. Also don’t forget that companies like Qantas have been roundly criticized in the past for their use of “off-balance-sheet-financing”. The detectives amongst you will be on the lookout for that in case the debt-assets ratio and other ration need to be adjusted to reverse what “off-balance-sheet” had been hiding. In its annual financial report QANTAS actually gives us numbers that make such an adjustment quite easy.
Debt-Equity ratio = {Interest-bearing short-term debt + Interest-bearing long-term debt + preference shares}/ Ordinary Equity.
Financial Leverage ratio = Total assets / Ordinary Equity
Debt to Assets ratio (also called Total Debt ratio or simply the Debt Ratio) = {Interest-bearing short-term debt + Interest-bearing long-term debt + preference shares}/ Total Assets.
Debt to Capital ratio = {Interest-bearing short-term debt + Interest-bearing long-term debt + preference shares}/ {Ordinary Equity + Interest-bearing short-term debt + Interest-bearing long-term debt + preference shares}
Note:Some analysts exclude S.T. debtfrom these ratios
(g)
Coverage. These ratios are covered in the text book and allow us to see to what extent a company can cover its interest payments and other fixed financial commitments e.g. lease payments.
(h) Growth and Risk analysis. Refer Lecture 6. Also refer to LMS document called “How to calculate Business Risk”. You may also want to look at “earnings volatility”. There is a formula in the appendix to that lecture.
(i) If you are competent you may want to try your hand at forecasting a future consolidated balance sheet and income statement for the next year in summary format. That skill may be just above the competency objective of this unit but where you see trends developing, e.g. EBIT margin consistently coming down, it may be possible for you to project out. Students doing smart work in this area will be rewarded additional marks.
If you have done down to item ‘h’ or “i” thoughtfully you will have completed a good operating and financial health check.
Report Submission Details
Submit
Hard Copyby:
Monday 1 Mayby 2 pmin Lecture
Word limit: 2000 (excluding tables, references). 15% tolerance
Note:
You should put any detail backing up your analysis in tables that you put in appendices. In the body of your report you reference these appendices.
Submission format:
Word Document
Referencing: Standard LTU guidelines apply to referencing, including in-text referencing and bibliography
How to Submit:
Hard Copy in classas well asTurnitin. Only one student on a team needs to submit.
Please indicate on front page: For EACH student: name, student number, name of tutor and time of tutorial.
Excel File Submission Details
Submit by:
Monday 1 Mayby 2 pm
How to Submit: Submit on LMS. A drop box has been set up to take the Excel File. Note that this is a
different drop boxto the Turnitin drop box.
. Indicate on front tab: For EACH student: name, student number, name of tutor and time of tutorial
