Financial Statement Analysis

Assignment 2 Analysis and Selection of Stock

Task outline A) Write a report analyzing two companies in the same industry.

This will include the company from assignment #1.

Recommend which company you would invest in and why?

B) Present your findings. The purpose of this presentation is to

share the understanding that you have gained of the industry and

the two companies. (Maximum 15 minutes)

Details:

Download the companys annual reports for the most recent two years. You will

be conducting a financial analysis for the most recent three year period. As you

are aware, the older annual report will contain information for years two and

three.

You may also use financial websites such as Yahoo, MSN Money, Report on

Business, etc. or financial databases from the Sheridan Library like Factiva,

Mergent Online, Thomson One, etc.

Make sure that you keep track of each source of information (see below).

Section A Executive Summary (10 MARKS)

1. Summarize your findings. Put your recommendation in the first

paragraph. You must have a sentence that reads something like,

We recommend that Company X shares be purchased. You

must make a choice.

2. This summary should be maximum two pages. The purpose of this

summary is to highlight the key information you have acquired about

the industry, the companies and financial information which was used

to justify your investment choice.

Section B Comparative Analysis (10 MARKS)

You are to perform a comparative analysis. So, you are to pick a company close to

the company you picked in Assignment 1. List your two companies on the forum.

First come first served.

In this section you will discuss how the new company is comparable to the one

you picked in Assignment 1 and what are the main differences in terms of

operations / business model, etc.

.

Section C Financial Analysis (55 MARKS)

1. Present each companys income statement and balance sheet for the past

three and two years respectively. You can type them into excel and then

copy and paste. (7 MARKS)

2. Compare the companies long term Revenue, Gross Profit (or Operating

Profit) and Net Income growth. What is the three year compound annual

growth rate for each company? Compare and contrast the two companies

and discuss how this will impact your investment decision. (6 MARKS)

3. You must calculate and compare ratios for each company in the categories:

(35 MARKS)

a. Liquidity

b. Leverage/Coverage

c. Activity

d. Profitability

e. Market Ratios

This is the most important section. Once you have analyzed the first

four sets of ratios, you should have a sense of which company is in a

better operating position. Now you must determine whether the

company is cheap or expensive based on the market ratios.

Help Box

Present the ratio analysis in tables so the reader is able to easily

understand your analysis that will follow.

For example:

Liquidity Ratios Company A Company B

Current ratio 2.3x 4.5x

Quick ratio 1.7x 3.6x

Etc. Etc.

Provide an analysis of the ratio.

o Use the 3 step approach analysis.

o Do not just repeat the numbers in the analysis section! You must

determine the reasons for the differences.

o The most relevant ratios to be used in your analysis depend on

your understanding of your companies.

4. Conclusion and support for investment recommendation (7 MARKS)

This should include a thorough discussion of your findings in reviewing

the two companies. Do not just state Company B is a better investment

decision because it has a lower P/E, or market price. Expand and support

the logic for your recommendation based on the financial analysis and

research you have done. In the end it is your decision as to what it the best

investment, there is often no correct answer, but what is important is the

analysis provided to support your recommendation.

Presentation (25 MARKS)

The point of the presentation is to share with the class the business

information you have learned. The class should be able to gain an

understanding of the industry, the two companies and how you approached

your analysis and your investment decision. This is meant to be a shared

learning experience for all. Marks will be awarded based on the creativity of

the presentation and the effectiveness to pass insightful messages.