Assessment Brief

Background:

You have recently joined a successful financial advisory firm as a financial analyst. The
financial advisory firm offers a range of services to its clients, including research and
recommendations to private and institutional investors and lenders on the investment and
credit potential of large UK listed firms.

Requirement:

You have been approached by your manager who oversees research on a number of firms,
including your allocated case study company. They would like you to prepare a report on
the investment potential of the firm. You are required to conduct an in-depth analysis of the
company’s financial performance and position, using information from their annual report
and other relevant sources of information. This analysis should conclude with a
recommendation based on one of the following scenarios (Your allocated company and
scenario will be communicated separately):

a) Should a 5-year loan application for the company be granted by its banks? 1 or

b) Should an equity investor purchase the company’s shares?

Guidance notes:

Suggested Structure (and word count per section2):

As you are preparing a business report you are expected to use suitable business language and format.
Our recommendation is that your report takes the following format:

Executive Summary: This should provide a succinct summary of the report by identifying its purpose, the
tools of analysis and key findings and recommendation.

Table of Contents

1
If you wish, you may make assumption about the purpose and size of the loan. However, your analysis must focus
on assessing the creditworthiness of the firm using the financial statements and other non-financial information to
support your assessment.
2
Please note that these are just indicative word count per section and you are free to include more or less. However,
overall word count for the entire report should not exceed the 3000 limit.
1.Introduction (300 words): This should provide an introduction to the report by presenting a brief
insight into the company e.g. its sector, key competitors, main segments, relevant recent financial news,
recent share price performance and any other background information deemed useful to provide a
context for your subsequent analysis. The introduction should also provide insight into how the company
will be analysed and a clear signposting to the content of the report.

2.Financial Analysis (1300 words): This represent the main body of the report and should include
detailed financial analysis for recent two years and a 5-year trend analysis for key ratios. This should be
accompanied by narrative interpretation which includes reference to both financial and non-financial
information sourced from the annual report and other relevant source of information. This should also
include relevant comparative analysis using suitable competitor or industry data as benchmarks.

Focus on the financial statements analysis lies on three aspects: Profitability, solvency & liquidity, and
valuation.

3.Quality Assessment (400words): This section should contain a critical evaluation of the company’s
earning and financial reporting quality for the past two years.

In terms of quality assessment, the lack of transparency and clarity may be something you should write
about. Also, other parts as well in regarding the company’s earning and financial reporting quality for
the past two years.

4.Conclusion and Recommendation (500 words): This section should conclude and provide a clear
recommendation of investment in the company by its bankers in the form of a loan or potential equity
investors (based on the scenario selected) with supporting justification, based on earlier analysis.

5.Reflection on report strength and weakness (500 words): This represents an addendum to the report
which captures your own reflection on your analysis. It should provide a short reflective commentary on
the limitations of your analysis and what you did or could have done to overcome or address those
limitations.

References: List alphabetically using Harvard style

Appendices: You may include relevant supporting information, e.g. list of ratios, extract from annual
report or other relevant document to support information in the main report etc.

Note:The items underlined form part of the word count

Guidance to the analysis

The analyst will be most concerned with financial performance supporting a

progressive dividend and hopefully share price growth.

So, compute a number of relevant ratios and measures to help assess dividend
potential and increase in share value potential:

 Growth:
o Revenue change %
o Sources of changes in revenue – e.g. breakdown by segments,
forex, acquisition etc
 Profitability – is the company making profit ? [which is the source of
dividends and improvement in share capital through retained earnings]
o Margins
o Return ratios – including Du Pont to investigate drivers of
performance
 Dividend potential and ability to service Dividend payment:
o DPS/Dividend Yield
o Dividend cover
o Consistency in generating operating cashflow
o FCFE – [dividends are paid from cash]
 Attractiveness of investment
o EPS
o P/E
o TSR
o Movement in share price
 Could also consider:
o Forecast of Dividends/EPS/Share price by other analysts
o etc

Other sources of information you could consider to supplement your analysis

in both scenarios could include:

 Share price performance – over time, e.g. last year, last five years etc
 Any information on future plans
 Risks and how they plan to respond to these risks
 Forecast of industry growth
 Sustainability related information, if you consider it to matter for your investors
 KPI performance
 Macroeconomic events and impact on the business – e.g. Brexit, Covid etc
 Competitor performance.
 Etc
o All these and more could be sourced from
 Financial Media
 Financial review section of the annual report
 CEO letter/ statement
  Company website
 etc

In reflecting on the limitations of your analysis, some of the issues that could
be discussed include the following:

 Reliance on financial statement information, which is:

 Tends to be historical and out of date - Past performance is not necessarily a
reliable indicator of the future.
o Quantitative – does not take into account qualitative information which might
be important in evaluating performance
o Assets without a specific and measurable historic cost are not recognised in
the Statement of Financial Position e.g. Goodwill, Brand Names, Expert Staff
o No real information is given about the quality of assets or their real value or
future potential
o Possibility that figures might have been manipulated – difficult to detect
o Values are impacted by estimates which are subjective – can impede
comparison
o Selection of competitors might have been difficult because peer companies
have different segments, follow different accounting rules etc
o Earnings could be of poor quality
o etc
 Your reflection could go on to comment on what you have done in your report to help
address some of these or what you would consider doing next time. E.g
o You may have sourced for non-financial information to bring more insight into
the analysis
o You may have compared similar segments of different companies instead of
comparison at the aggregate level
o You may have searched for and considered forward-looking information to
support your recommendation rather than only rely on the past
o You may have attempted to evaluate the quality of earnings by identifying
any red flags but acknowledge some of the challenges here too.
o Etc
 Your reflection should be personal – based on what you have done and considering
the issues most relevant to the company you have analysed and the scenario you
have assessed.