Financial Ratios Assignment and Research Activity

This assignment will require some analysis of financial ratios and some research. Select an industry and two firms within the industry as described below and analyze the Return on Equity (ROE) of both firms and the market valuation ratios.

To retrieve the data do the following steps:

1. Go the the Locating Company and Industry Information Research Guide:http://guides.erau.edu/c.php?g=153738&p=1009866 2. Click on Key Business Ratios 3. Follow instructions for Mergent Online to generate report including industry and selected firms

Step Action 1 Go the the Locating Company and Industry Information Research Guide:http://guides.erau.edu/c.php?g=153738&p=1009866 2 Click on Key Business Ratios

3 Follow instructions for Mergent Online to generate report including industry and selected firms

This submission should include a spreadsheet.This should include the selected firms as well as a summary of the industry's ratios.

For this assignment I am looking at a number of ratios for a firm and comparing to industry averages.

For this assignment we are going to focus on one ratio which can actually be calculated using three other ratios. That ratio is the Return on Equity. Return on Equity can be calculated in the following manor:

ROE = net profit margin x asset turnover / equity ratio

= earnings to owners x revenues / common equity revenuesassets assets

= earnings to owners x revenues x assets revenuesassets common equity

look at what cancels and you are left with

earnings/equitywhich is ROE ROE is comprised of:

Profit Margin (bottom line) Turnover (asset utilization) Equity ratio (financial cushion)

A note on equity ratio: (equity/assets) Say a firm had $100 in assets and $37 dollars in equity The equity ratio would be 37/100 or 0.37 What does that mean? How can a firm be financed? How much came from equity (owners)? How much from creditors? In this case for every dollar of assets, owner have funded 0.37 cents and creditors 0.63 cents.

The second set of ratios you will need to consider are market value ratios. How does the firm you selected compare to industry averages, main competitor(s) etc.

We will need to select an industry using the referenced database and download the data. Select two firms one with a relatively high ROE and one with a relatively low ROE in the industry. Analyze each of the firms taking into consideration the components of ROE as identified above. This will require you to do some additional research regarding ROE analysis.

Hints: You may want to look at each of the components of ROE and compare those. You may want to look up (another book, online, etc) DuPont Identity or DuPont Analysis. Realize the components you need to analyze may or may not be in the spreadsheet you download from the referenced database. If not find what you need but make sure you document where you find any data used. (Yahoo finance is a good site and there are others.)

Some thoughts to keep in mind: Margins reflect the firm's production function. If margins are low what could be done to improve them?

Total asset turnover deals with the marketing function. If turnovers are low what might a firm wish to consider to improve its performance?

Equity ratio is the finance province. Issues to consider are if you are being too conservative (not employing enough cheap debt)?

For the deliverable:

Include the downloaded industry spreadsheet for the industry selected.

Identify the firms selected within the spreadsheet by changing the color of the font for that firm on each tab to red.

A table will be needed that calculates the ROE for each firm using the three components. Make sure each column is labeled. (It should have columns that are labeled ROE, Net Profit Margin, Asset Turnover, Equity Ratio) Then create a similar table for the market value measures.

Then Prepare a brief paper; about two pages maximum (2 plus/minus a half page). The paper should address the reasons why one firm has a high ROE, why one firm has a low ROE and what could be done to improve the lower performing firm based on ROE (if it is really performing at a lower level). Perform similar contrast and comparisons for the market value ratios.

Be sure to address issues such as marketing, asset utilization, financing and if your chosen firm appears to be under or overvalued.