Welcome to MBAA 502

Office Hour
 Agenda

• Check up
• Presentation & Discussion Financial Analysis Report
 Term Paper
Financial Analysis Report
Organization: Begin With an Outline
An outline is a blueprint for the paper
It helps you map your way through the writing process without missing important elements
Keeps you focused

BEGIN BY:
Creating a skeleton with headings and subheadings based on the instructions for the report
Report Components
Grading Criteria Maximum Points

Description of the firm’s products, markets, risks 5

Income statement and balance sheet assessment 20

Ratio and trend analysis prepared with supporting analysis 45

Statement of cash flow analysis 10

Conclusion/summary of financial condition of the firm 5

Excel documentation 5

Spelling, punctuation, grammar, APA 10

Total 100
Balance Sheet and Income Statement
Trends

Balance sheet: Shows firm’s assets liabilities and owners’ equity

Income statement : Details income, expenses, and profits/loss
Cash flow statement: Explains sources of cash and how it was spent
Analysis of Balance Sheet and Income Statement

Common sized statements

◦ express each balance sheet item as a % of total assets
◦ express each income statement item as a % of sales

Horizontal (comparative) and vertical analysis

Common Sized Income Statement
Common Sized Statement with Sample Comments
• The cost of goods sold is 7% lower than
the industry average,

• selling expenses and administrative

expenses are 3% and 2% higher than the
industry average, respectively.

• The combined impact causes net income

as a percent of sales to be 2% better than
the industry average.

• The company is managing the cost of

manufacturing product better than the
industry is but has slightly higher selling
and administrative expenses relative to the
industry.
Horizontal Analysis with Sample Comments
• Profitability improved significantly
from 20Y1 to 20Y1.

• Sales increase by 32% over base year

• COGS, selling expenses and admin

expenses grew at a slower rate then
sales

• Increasing sales combined with

costs that increase at a slower
rate results in strong earnings
growth. In this case, net
income grew 53.6% over the
base year.
Vertical Analysis
Vertical Analysis with Sample
Comments
• The net income as a percent of sales
has declined.

• All the costs and expenses, other

than selling expenses, have
maintained their approximate cost as
a percent of sales between 20Y1 and
20Y2.

• Selling expenses as a percent of

sales, however, have grown from
16.0% to 20.0% of sales.
Ratio Analysis
3 ratios (minimum) from each category

Liquidity
Leverage
Asset management
Profitability
Market Values
Display Format For Presentation of Ratios
Table or graph followed immediately by discussion
 Presentation and Sample Comments
Company Y has a higher return on total assets
Company X Company Y (10,1% vs. 8%)
Return on total assets 8% 10.1
Company X has significantly higher return on
Return on stockholders’ 55.5% 18.5 stockholders’ equity ( 55.5 % vs 18.8%)
equity
Ratio of debt to equity 5.9 1.0 Company Y weaker performance appears to be
due to its weak earnings relative to its debt level.

Company Y has less leverage than Company X.

This is confirmed by the ratio of liabilities to
stockholders’ equity, which shows that the
relative debt held by company X is 5.9 times
stockholders’ equity, compared to 1.0 times for
Company
 Graphical Presentation with Sample Comments

Both return on total assets and return on stockholders’ equity have been moving in a negative direction over the
last 5 years. Over the last 2 years, both have dropped below the industry average., The decline is due largely to
a rapid drop in earnings
Conclusions & Analysts’ Recommendation
Conclusions based on your findings
Research for analysts’ recommendation
Format
◦ Paper format: APA required.
◦ Supporting financial data prepared using Excel. Excel documentation concise, clear,
supports narrative and requirements.
◦ Students may include additional reference materials such as financial statements, web
citations, and citations from research books.
◦ Students are not to copy and paste financial statements or other materials directly from the
web into their analysis (Word) file.
 Reference page includes all references cited, APA format for references