JOU 3121 Spring 2010 Project 2 Outline: Company Profile

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1 JOU 3121 Spring 2010 Project 2 Outline: Company Profile You are going to profile and compare 2 large U.S. Public companies (public means stocks are traded in the stock market) The companies to be profiled must operate in the same market. For example 2 media companies, or 2 healthcare companies, or 2 insurance companies, etc. The profiles should include company financials; recent items in the news, some of their future plans, etc. In addition, find one of the major players in the company (CEO, President, etc.) and write up a brief profile on him or her. Using the business ratios that we have discussed, compare the 2 companies in terms of liquidity, profitability and any other ratio that seems to contribute to your comparisons. Use Excel to compare the 2 companies through the applied ratios. Show the comparisons in charts. Project Checklist: 1. The main narrative/story should include the main company s profile (main description of the company and what it sells/provides to consumers, important history/origins (dates, founder(s) etc.). Who the main competition is and a shorter profile of the company you re comparing it to. Plus, recent news stories, future plans, etc. In addition, a brief profile of a major player (who it is, some background, salary (if possible), etc. 2. Also, the narrative should include important financial information. This is where you should incorporate the ratio information with charts, etc. Make sure that you include the main spreadsheet that you used for the ratios that include the formulas used to calculate the ratios. Plus, an area in the spreadsheet or in a separate spreadsheet where you did your work to create the charts. 3. The entire project should be handed in on a CD. The CD should include the main narrative/story along with references/sources as a Word file. Plus, include all the Excel files that you used and any other files that were used for the project. 1

2 Financial Ratios: brief descriptions of basic ones Quick Ratio Formula to calculate quick ratio: Quick ratio = (cash + marketable securities + accounts receivable) / current liabilities. Quick ratio definition and explanation: The quick ratio is used to evaluate liquidity. Higher quick ratios are needed when a company has difficulty borrowing on short term notice A quick ratio of over 1:1 indicates that if the sales revenue disappeared, the business could meet its current obligations with the readily available "quick" funds on hand. A quick ratio of 1:1 is considered satisfactory unless the majority of "quick assets" are in accounts receivable and the company has a pattern of collecting accounts receivable slower than paying accounts payable. Profit Margin Ratios Formulas to calculate profit margin ratios: Net Profit Margin Ratio (After Tax Margin Ratio) = net profit after tax / sales. Pretax Margin Ratio = net profit before taxes / sales. Operating Profit Margin (Operating Margin) = net income before interest and taxes / sales. Profit Margin Ratios definitions and explanations: 2

3 These three profit margin ratios state how much profit the company makes for every dollar of sales. The net profit margin ratio is the most commonly used profit margin ratio. A low profit margin ratio indicates that low amount of earnings, required to pay fixed costs and profits, are generated from revenues. A low profit margin ratio indicates that the business is unable to control its production costs. The profit margin ratio provides clues to the company's pricing, cost structure and production efficiency. The profit margin ratio is a good ratio to benchmark against competitors. Extended List of Ratios: These financial ratios are generally understood as measures of firm and industry efficiency: 1. Accounts Receivables Turnover Sales/ Accounts Receivable Related financial ratio: Collection Period or Day s Receivables Accounts Receivable Turnover X 365 This ratio is also listed in the explanation of Liquidity Ratios in the Financial Analysis Edge #6. This ratio measures the number of times that receivables turn over during the year. The higher the turnover of receivables, the shorter the time between sale and cash collection. If a company's Turnover Rate is significantly lower than industry norms, the underlying reason (poor collection methods, high risk customers, low sales) needs to be pinpointed. The Day s Sales Receivables measures the average time in days that receivables are outstanding. The higher the number of days outstanding, the greater the collection risk. The day s receivables rate may suggest a concern over credit control and collections. 2. Sales to Inventory (Inventory Turnover) Sales/Inventory This ratio gives a picture of how quickly inventory turns over. Ratios below the industry norm suggest high levels of inventory. High ratios could indicate product levels insufficient to satisfy demand in a timely manner. 3. Assets to Sales Total Assets/Sales Related financial ratio: Total Asset Turnover Sales/Total Assets This financial ratio indicates whether a company is handling too high a volume of sales in relation to investment. Very low percentages relative to industry norms might indicate overly conservative sales efforts or poor sales management. 4. Sales to Net Working Capital 3

4 Sales/Net Working Capital note: Net Working Capital = (Current Assets-Current Liabilities) Net Working Capital levels higher than industry norms may indicate or a strain on available liquid assets, while low ratios may suggest too much liquidity an inefficient use of capital. Working capital is a concern of measure of current creditors since it reflects ability to finance current operations. Comparing sales from operations to working capital indicates how well working capital is employed. 5. Accounts Payable to Sales Accounts Payable/Sales Related Financial Ratio: Accounts Payable Turnover Sales/Accounts Payable Accounts Payable to Sales measures the speed with which a company pays vendors relative to sales. Numbers higher than typical industry ratios suggest that the company is using suppliers to float operations. 6. Sales to Net Fixed Assets (Fixed Asset Turnover) Sales/Fixed Assets This ratio measures the productive use of a firm's fixed assets. Largely depreciated fixed assets or a labor intensive operation may cause a distortion of this ratio. 7. Sales Per Employee Sales/Full Time Equivalent Employees A non-traditional ratio which requires data (employment) outside the balance sheet. These financial ratios are generally understood as measures of firm and industry liquidity: All ratios are derived from balance sheet data. 1. Quick Ratio (Cash + Accounts Receivable)/ Current Liabilities The Quick Ratio indicates liquid assets available to cover current debt. It is also known as the Acid Ratio. This is a harsher version of the Current Ratio, which balances short-term liabilities against cash and liquid instruments. Generally, any value of less than 1 to 1 suggests an over-reliance on inventory or other current assets to pay off shortterm debt. 2. Current Ratio Current Assets/ Current Liabilities The Current Ratio measures current assets available to cover current liabilities, a test of near-term solvency. The ratio indicates to what extent cash on hand and disposable assets are enough to pay off near term liabilities. Higher ratios indicate a better buffer between current obligations and a firm's ability to pay them. The quality of current assets is a critical factor in interpreting this analysis. 3. Current Liabilities to Net Worth Current Liabilities / Net Worth This ratio reflects a level of security for creditors. The larger the ratio relative to industry norms, the less security there is for creditors. 4. Total Liabilities to Net Worth Total liabilities/ Net Worth This ratio helps to clarify the impact of long-term debt, which can be seen by comparing this ratio with Current Liabilities: Net Worth. Creditors are concerned to the extent that total liability levels exceed Net Worth. 5. Sales to Net Working Capital Sales/Net Working Capital Note: Net Working Capital = (Current Assets-Current Liabilities) Sales-to-Net Working Capital levels higher than industry norms may 4

5 indicate or a strain on available liquid assets, while low ratios may suggest too much liquidity an inefficient use of capital. Working capital is a concern of measure of current creditors since it reflects ability to finance current operations. Comparing sales from operations to working capital indicates how well working capital is employed. 6. Fixed assets to Net Worth Fixed Assets / Net Worth. High Fixed Assets to Net Worth ratios relative to the industry can indicate low working capital or problematically high levels of debt. 7. Cash Turnover Sales/Cash This ratio reflect the number of times that cash in hand turns over in a year. As a comparison to sales, it is a more stringent measure of liquidity than the Current asset Turnover. 8. Current Asset Turnover Current Assets/Cash This ratio reflects the number of times that current assets turn over in a year. As a comparison to sales, it is a less stringent measure of liquidity than the Current asset Turnover. 9. Current Liabilities to Inventory Current Liabilities / Inventory A high Current Liabilities to Inventory ratio, relative to industry norms, suggests over-reliance on unsold goods to finance operations. 10. Cost of Sales to Inventory Cost of Sales / Inventory Related financial Ratio: Days Inventory (Cost of Sales/Inventory) / 365 This financial ratio measures the number of times inventory is turned over during the year. High inventory turnover suggests good levels of liquidity. Conversely it can indicate a shortage of needed inventory for sales. Low inventory turnover can indicate poor liquidity, overstocking, or, more optimistically, a planned inventory buildup. Days' Inventory measures the average length of time that product remains in inventory. 11. Cost of Sales to Accounts Payable Cost of sales / Accounts Payable Related Ratio: Days' Payables 365/ (Cost of sales / Accounts Payable) This ratio measures the number of times that Accounts Payable turns over during the year relative to the Cost of Sales. Elevated turnover rates suggest a shorter time period between purchase and payment. Lower than industry rates may suggest cash shortages, or expansion of trade credit. Days' Payables divides the basic ratio into 365 days, producing the average length of time trade debt is outstanding. 12. Accounts Receivables Turnover Sales/ Accounts Receivable Related financial ratio: Collection Period or Day s Receivables Accounts Receivable Turnover X 365 This ratio measures the number of times that receivables turn over during the year. The higher the turnover of receivables, the shorter the time between sale and cash collection. If a company's Turnover Rate is significantly lower than industry norms, the underlying reason (poor collection methods, high risk customers, low sales) needs to be pinpointed. The Day s Sales Receivables measures the average time in days that receivables are outstanding. The higher the number of days 5

6 outstanding, the greater the collection risk. The day s receivables rate may suggest a concern over credit control and collections. These financial ratios are generally understood as measures of firm and industry profitability: All ratios are derived from balance sheet data. 1. Return on Assets: Net Profit /Total Assets Return on Assets (pre and post tax) is a critical indicator of profitability. Companies which use their assets efficiently will tend to show a ratio higher than the industry norm. 2. Return on Net Worth: Net After Tax Profit / Net Worth This is the 'final measure' of profitability to evaluate overall return (pre and post-tax). This ratio measures return relative to investment in the company. Return on Net Worth indicates how well a company leverages the investment in it. 3. Return on Sales Net After Tax Profit / Annual Net Sales This measure indicates the level of profit from each dollar of sales. This ratio can be used as a predictor of the company's ability to withstand changes in prices or market conditions. These balance sheet definitions generally follow the accepted balance sheet line items. Not all standard items are listed: Assets Accounts Receivable: A short-term asset, usually representing a credit for a completed sale; part of Current Assets. Cash: Money on hand in checking, savings or redeemable certificate accounts; part of Current Assets. Current Assets: The sum of a firm's cash, accounts receivable, inventory, prepaid expenses and marketable securities which can be converted to cash within a single operating cycle. Inventory: The stockpile of unsold products. Total Assets: The sum of current assets and fixed assets such as plant and equipment. Liabilities : Accounts Payable: A short-term liability, usually representing invoices and bills due within one year; part of Current Liabilities. Current Liabilities: Measurable debt owed within one year, including accounts payable, accrued liabilities, taxes due and short-term notes due. Long Term Debt: Liabilities due in more than one year. Total Liabilities: Current liabilities plus long term liabilities such as notes and mortgages due over more than one year. Net Worth: Current assets plus fixed assets minus current and longterm liabilities. Income Statement Net Sales: Annual volume of sales. Cost of Sales: Cost of operations and production which reduce profit margins. Gross Profit: Pre-tax profits Net After Tax Profit: Sales revenue less expenses, after taxes. Net Working Capital: Current assets minus current liabilities. Available online at 6

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