Written Assignment 2

Profitability, Coverage, Liquidity and Solvency Analysis

Company Name_________________________ Student Name________________________

Complete the worksheets for your company:
 Worksheet D: NOPAT.
 Worksheet E: NOA.
 Worksheet F: Profitability, Coverage, Liquidity, and Solvency Ratios.

Revenue Analysis:
Revenue is the largest item on the income statement, and we must assess it on a quantitative and
qualitative basis. Consider the current economic environment and the company’s competitive
landscape. Read the management’s discussion and analysis (MD&A) section of the 10-K to learn how the
companies’ senior managers explain revenue levels and changes.
1. Briefly discuss the company’s revenue recognition policy and compare it to the other close
competitor.

2.
a. Use horizontal analysis to identify and discuss any time trends for revenues over the three year
period.

b. If the company distinguishes among types of revenue on the income statement, find the
footnote on segment revenues and profits and discuss trends or significant changes. Use
horizontal and vertical analysis to identify any changes in the product line mix or where sales are
growing most quickly.

3. Discuss whether the company’s revenue levels and changes seem appropriate and in line with
external factors.

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Written Assignment 2

Profitability, Coverage, Liquidity and Solvency Analysis

Company Name_________________________ Student Name________________________

Profitability Analysis:
4.
a. Evaluate the gross profit margin over the three year period. Does the ratio show an increasing or
decreasing trend, and what might this signify?

b. Read the MD&A to determine senior management’s take on any trends. Discuss whether
management’s explanation seems appropriate and in line with the changes.

c. Compare the gross profit margin for the most recent year with that of its close competitor. Do
you notice any significant differences, and if so, what is your explanation for this?

5.
a. Evaluate the operating expense margin over the three year period. Does the ratio show an
increasing or decreasing trend, and what might this signify?

b. Identify any significant operating expenses and discuss their trends over the three years. If there
are significant changes for these expenses, explain why.

c. Read the MD&A to determine senior management’s take on any operating expense margin
trends. Discuss whether management’s explanation seems appropriate and in line with the
changes.

d. Compare the operating expense margin for the most recent year with that of its close
competitor. Do you notice any significant differences, and if so, what do you believe is the
explanation for this?

6. Did the company report any unusual significant operating or nonoperating expenses during the
three year period, such as impairment loss, restructuring costs, pension expense, interest expense,
etc.? If so, be sure to identify, explain, and discuss the effect these expenses had on profitability.

7.
a. Compare ROE and RNOA and discuss any differences over the three year period.

b. Compare ROE and RNOA for the most recent year with that of its close competitor. Which
company is more profitable, and how do the companies’ operating and nonoperating portions of
ROE compare? Are the companies’ net operating profit margins and the net operating asset
turnover ratios similar or markedly different? Discuss any differences.

Coverage Analysis:

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Written Assignment 2

Profitability, Coverage, Liquidity and Solvency Analysis

Company Name_________________________ Student Name________________________

8.
a. Analyze, interpret, and discuss the company’s coverage ratios and the ratio trends over the
three year period.

b. Compare the coverage ratios for the most recent year with that of its close competitor. Do the
ratios suggest that your company has a higher or lower level of risk of default, both in the short-
term and in the long-term?

Liquidity Analysis
9.
a. Analyze, interpret, and discuss the company’s liquidity ratios and the ratio trends over the three
year period.

b. Compare the liquidity ratios for the most recent year with that of its close competitor. Do the
ratios suggest that your company has a higher or lower liquidity risk?

Solvency Analysis
10.
a. Analyze, interpret, and discuss the company’s solvency ratios and trends over the three year
period.

b. Compare the solvency ratios for the most recent year with that of its close competitor. Do the
ratios suggest that your company has a higher or lower solvency risk.?

Conclusion
11. Conclude with a brief assessment about the company’s profitability, coverage, liquidity and
solvency. Express an opinion about whether the company has an appropriate level and types (e.g.,
short-term and long-term) of debt and whether you expect the company to continue operating with
its existing capital structure.

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