Analyze financial statement ratios used to measure the financial performance of a business entity.

Financial statement analysis is the process of analyzing a company's financial statements to make better economic decisions. The process for financial statement analysis includes specific techniques for evaluating risks, performance, and future prospects of an organization.

This task is separated into three parts and based on a fictitious company. Part 1 has the Balance Sheet and Income Statement to calculate the five categories of ratios. Part 2, will need to be calculated and explain the significance of the liquidity, activity, financing, profitability, and market value ratios, and provide a year-to-year comparison of assessed financial trends. Part 3, will need to compose an analytical study to assist the CEO of your company to determine if ABC Company, a technical company dealing with software and hardware, would be a good investment as an acquisition.

Part 1

Use the worksheet below to assist you in completing this part of the task. Will need to use this information to complete the task. The second worksheet contains a breakdown of categories of ratios where you will complete the calculations for each ratio. You will also enter the formula written out as to what information you have used to do the calculations.

Use the five classifications of financial ratios to assess the financial performance of ABC Company.

The writing should include a measure of and analysis of financial outcomes based on the ratios for each financial ratio classification (i.e., the liquidity classifications of ratios are based upon the quick and current ratio outcomes).

Will need to calculate ratios for each classification for the 3 years of data (i.e., the current ratio may have been 1.5 the first year, 1.35 the second year, and .75 in the most recent year). It is based on these results that you will measure financial performance, or trends, from one year to the next. It is imperative that the ratios-numbers, and quantitative outcomes, support your analysis.

1. Using the data from the Income Statement and Balance Sheet, provide the correct calculation of the liquidity ratios and an assessment of the company's ability to maintain liquidity and the management of current assets and current liabilities. Include the proper assessment of outcomes as positive or negative trends when all ratio outcomes are factored as a group.

Liquidity Ratios

Current Ratio Quick Ratio

2. Using the data from the Income Statement and Balance Sheet, provide the correct calculation of the activity ratios and an assessment of the company's ability to maintain liquidity. Include the proper assessment of outcomes as positive or negative trends when all four ratio outcomes are factored as a group.

Activity Ratios

Inventory Turnover Accounts Receivables Turnover Total Asset Turnover Average Collection Period

3. Using the data from the Income Statement and Balance Sheet, provide the correct calculation of the financing ratios. Include the proper assessment of outcomes as positive or negative trends when all three ratio outcomes are factored as a group.

Financing Ratios

Debt Ratio Debt-to-Equity Ratio Times Interest Earned Ratio

4. Using the data from the price per share data, the Income Statement, and the Balance Sheet, provide the correct calculation for the market value ratios below.

Market Value Ratios

Earnings per Share (EPS) Price Earnings (PE)

5. Using the data from the Income Statement and Balance Sheet, provide the correct calculation of these four profitability ratios and an assessment of the company's ability to maintain if not improve profitability based on the amounts of equity, assets, and levels of profits from sales. Include the proper assessment of outcomes as positive or negative trends when all four ratio outcomes are factored as a group.

Profitability Ratios

Return on Equity (ROE) Return on Assets (ROA) Net Profit Margin Operating Profit Margin

Part 2

In this part of the task, compose an analytical study reporting your results from Part 1. The CEO of your company is forming a task force to review the financials and present a review for acquisition of ABC Company. Based on ABC's previous 3 years of financials, determine if this would be a good acquisition. You must form the task force to complete the task.

The CEO would like most of the departments to participate in the process. Using each department's area of expertise, what information would each of the following departments contribute to the final decision? Provide a minimum one-paragraph response for each department.

Finance Department Sales Department Marketing Department Human Resources Legal Department

Part 3

After each department has provided input on the effect the acquisition will have on their department, perform an overall analysis to explain your recommendation to the CEO. Your analysis should include the following:

Explain how the company is trending based on the year-over-year ratios. Compare the company to the industry average in Appendix A in areas of profitability, management effectiveness, and efficiency. Based on the above, summarize the pros and cons of ABC Company using both the year-over-year ratio analysis from Part 1 and the industry average comparisons from Part 3. Provide a final recommendation as to whether or not the CEO should invest in ABC Company.

ABC Company Income Statement
Period Ending			31-Dec-15		31-Dec-14		31-Dec-13
Total Sales			$485,651,000		$476,294,000		$475,210,000
Cost of Goods Sold			365,086,000		358,069,000		350,400,000
Gross Profit			120,565,000		118,225,000		124,810,000
Selling Generall and Adminstrative		93,418,000		91,353,000		90,343,000
Operating Profit			27,147,000		26,872,000		34,467,000
Total Other Income/Expenses Net			113,000		119,000		115,000
Earnings before Interest and Taxes		27,034,000		26,753,000		34,352,000
Interest Expense			2,461,000		2,335,000		2,200,000
Income Before Tax			24,573,000		24,418,000		32,152,000
Income Tax Expense			7,985,000		8,105,000		9,800,000
Net Income from Continuing Ops		16,588,000		16,313,000		22,352,000
Discontinued Operations			285,000		144,000		182,000
Net Income (Net Profit)			$16,303,000		$16,169,000		$22,170,000
14,000,000 Shares outstanding
Market Share price per share			$10.00		$9.00		$8.50
ABC Company Balance Sheet
Period Ending			2015		2014		2013				2015		2014		2013
Assets									Current Liabilities
Current Assets									Accounts Payable		58,583,000		57,174,000		56,210,000
Cash and Cash Equivalents			$9,135,000		$7,281,000		$6,789,000		Other current Liabilities			89,000		55,000
Net Receivables			6,778,000		6,677,000		6,525,000		Short-term Debt		6,689,000		12,082,000		14,050,000
Inventory			45,141,000		44,858,000		43,989,000		Total Current Liabilities	65,272,000		69,345,000		70,315,000
Other Current Assets			2,224,000		2,369,000		2,199,000		Long-term Debt		43,692,000		44,559,000		45,324,000
Total Current Assets			63,278,000		61,185,000		59,502,000		Deferred Long-term Liability charges	8,805,000		8,017,000		13,553,000
Property Plant and Equipment			116,655,000		117,907,000		120,300,000		Monority Interest		4,543,000		5,084,000		6,875,000
Goodwill			18,102,000		19,510,000		17,900,000		Total Liabilities		122,312,000		127,005,000		136,067,000
Other Assets			5,671,000		6,149,000		4,500,000
Total Assets			203,706,000		204,751,000		202,202,000		Miscellaneous Stock Options Warrants	0		0		0
									Common Stock		323,000		323,000		323,000
									Retained Earnings		85,777,000		76,566,000		65,750,000
									Captial Surplus		2,462,000		2,362,000		2,262,000
									Other Stockholders Equity	-7,168,000		-1,505,000		-2,200,000
									Total Stockholders Equity	81,394,000		77,746,000		66,135,000
									Total Liabilities & Stockholders Equity	203,706,000		204,751,000		202,202,000
									# of Shares Outstanding	14,000,000		14,000,000		14,000,000
									Market share price per share	$10.00		$9.00		$8.50

Ratio Calculations
		2015		2014		2013		Formula Used (Write out formulas)
Liquidity Ratios
Current Ratio
Quick Ratio
Activity Ratios
Inventory Turnover
Accounts Recievables Turnover
Total Asset Turnover
Average Collection Period
Financing Ratios
Debt Ratio
Debt-to-Equity Ratio
Times Interest Earned Ratio
Market Ratios
Earnings per Share (EPS)
Price Earnings (PE)
Profitability Ratios
Return on Equity (ROE)
Return on Assets (ROA)
Net Profit Margin
Operating Profit Margin

Appendix A
Technology 3-Year Average for Industry Averages
Profitability
Gross Margin	66.15%
Operating Profit Margin	12.04%
Net Profit Margin	6.01%
Earnings per Share	1.49
Management Effectiveness
Return on Equity	12.40%
Return on Assets	5.61%
Return on Investment	14.42
Quick Ratio	2.87
Current Ratio	2.57
Debt-to-Equity	61.01%
Total Debt to Equity	57.08%
Efficiency
Total Asset Turnover	0.55
Inventory Turnover	44.98
Accounts Receivable Turnover	8.21