Obtain each of your company's annual reports for the 2021, 2020, and 2019 financial years from the company's website or www.asx.com.au. The annual reports contain the chairperson's report, directors' report and financial statements (Statement of Financial Position, Statement of Profit or Loss, Statement of Changes in Equity, Statement of Cash Flows and Notes to the Financial Statements). The financial statements include comparative figures from the prior year, therefore, you will have data for four financial years: 2021, 2020, 2019 and 2018. 

Research the financial press and other sources of available information to familiarise yourself with the industry in which your allocated companies operate and with company specific factors that may have or will affect either company's performance.

Two business scenarios are described below. Scenario 1 relates to Company A only and Scenario 2 involves Company A and Company B. Knowledge of the industry, company specific context and their financial data will be important inputs that inform the decision that you recommend in relation to each scenario.

Scenario 1

Company A has submitted an application to the Bank of Brisbane for a loan. The amount of the loan is equal to 40% of total shareholders' equity at the end of the financial year 2021. The purpose of the loan is to fund expansion of Company A's operating capacity. The loan term sought is 10 years and the loan would be secured against company's property.

Assume you are a branch lending officer of the Bank of Brisbane who assesses loan applications. The lending officer must make a recommendation to the head office lending manager advising whether the loan application from Company A should be accepted or rejected.

Scenario 2

Both Company A and Company B have offered St. Lucia Investments Limited, a listed investment company (LIC), a private placement of ordinary shares. The amount of share offer is equal to 30% of total shareholders' equity of each company at the end of the 2021 financial year. St. Lucia Investments Ltd can afford either of the two private placements. The purpose of an increase in equity for each company is to raise funds to finance an expansion of operating capacity.

Assume you are an investment manager at St. Lucia Investments Ltd who evaluates private equity placements. St. Lucia Investments Ltd has limited funds available for investing decisions. The manager must make a recommendation to the board of directors advising whether to accept Company A's offer to sell to St. Lucia Investments a new issue of ordinary shares and reject Company B's offer, or accept Company B's offer to sell to St. Lucia Investments a new issue of ordinary shares and reject Company A's offer or alternatively reject both offers.

1. Company background research

Review Company A's and Company B's annual reports, articles in the financial press and other sources of information. Write a short response to each item below to build background knowledge of each company and their industry.

(a) Describe the operating activities of each company noting similarities and differences between Company A and Company B.

(b) Identify two common economy wide factors and two common industry factors that could impact on the financial performance and position of two companies. Also identify two specific factors which could impact the financial performance and position of company A and B, respectively. (In total, you should identify and analyse, at least, eight factors.)

2. Financial ratio analysis

Calculate financial statement ratios for the 2021, 2020 and 2019 years for Company A and Company B respectively. Use the Excel template provided on Blackboard under the Assessment tab to present the analysis in a table. Obtain data for the ratios from the financial statements and notes to the accounts. You may add to this template (calculate additional ratios). See further instruction in the template.

Additionally, use horizontal analysis to present the trend in sales revenue and net profit for Company A and B respectively, assuming 2019 as the base year.

3. Lending decision

Write a business memorandum to the Bank of Brisbane head office loan manager from the branch bank lending officer in Scenario 1. The memorandum must address the following points below.

(a) Evaluate and discuss your assessment of the ability of Company A to repay the loan and interest. Make a recommendation to accept or reject the 10-years term loan application from Company A and justify your recommendation. Use knowledge that you have acquired in your company research from Q1 and refer to relevant ratios calculated in Q2.

(b) Briefly discuss Company A's net cash flows from operating, investing and financing activities and the trends evident over the last three years. Explain how this analysis is consistent with your accept or reject recommendation.

(c) The use of estimates, cost, alternative accounting methods, the presence of atypical data, and diversification of firms have been cited as factors that limit the usefulness of financial statement analysis. In your recommendation, please discuss the limitation of your financial statement analysis. Identify ratios and explain how one or more of the limiting factors can affect the usefulness of that ratio.

4. Investment decision

Write a business memorandum to St. Lucia Investments Ltd's board of directors from the investment manager in Scenario 2. The memorandum must address the points below.

(a) Use the most relevant financial ratios to analyse and compare trends in profitability and risk of Company A and Company B for the 2021, 2020 and 2019 years. Discuss your assessment of relative profitability and risk of both companies.

(b) Recommend whether St. Lucia Investments should invest in Company A or Company B or alternatively reject both offers. Justify the recommendation based on the evaluation of risk and profitability of each company and other relevant background information obtained from the annual reports and other sources. Use knowledge that you have acquired in your company research from Q1 and refer to the relevant ratios calculated in Q2.

(c) Explain the meaning of the price earnings (PER) ratio and EPS. Describe three year trends in these ratios for Company A and B and discuss their relevance to the investment decision.