1. Horizontal and vertical analysis of the Income Statements for the past three years (all yearly balances set as a percentage of total revenues for that year).
2. Horizontal and vertical analysis of the Balance Sheets for the past three years (all yearly balances set as a percentage of total assets for that year).
3. Ratio analysis (eight ratios of your choosing) for the past three years PLUS a measurement for the creditworthiness of your firm as measured by Altman's Z-score. Note that if you used your chosen firm for our ratio-related discussion posts, then you MUST also present industry-average ratios or current year competitor ratios for your ratio analysis. Comparing your firm's ratios to a close competitor or an industry-average ratio makes your analysis much more meaningful.
Part 2: The Paper:
- 4-6 pages in length.
- Include a proper introduction and conclusion.
- Include a reference page.
- Your paper should provide your reader with an overall understanding of the financial health of your chosen firm including the following:
o Discussion of the ratio analysis results, including rationale for the ratios chosen.
o Discussion of all horizontal and vertical analysis.
o Discussion of four items from the management discussion of the firm that support the conclusion formed in your discussion of the financial results.
Much of this course has concentrated on learning the financial statements, primarily because there was not an accounting prerequisite. Because of this concentration, you may find this assignment challenging. However, if you understand the financial statements, then the horizontal and vertical analysis should (hopefully) be rather intuitive. For example, if you see sales rise by 20%, then shouldn't you also see net income rise by 20% or more if the managers are effective at controlling costs? If you see sales rise by 20% and assets rise by 40%, we have to ask why this is happening. It would appear that assets have risen too far given the sales that are generated from those assets-why did this occur? You may have to research that type of question and discuss it in your analysis.
You've had some experience with financial ratios through Discussion Board. I'd suggest that you start your ratio analysis with the four ratios found in the DuPont equation. If you discover a weakness in one component of the DuPont ratios, then it would make sense to look at ratios that are closely related to the troublesome ratio. For example, if you discover that the asset turnover is declining over time, then take a look at some related ratios such as the inventory turnover rate or the average collection period. If you discover that the equity multiplier is increasing (indicating greater reliance on debt), then look at some related ratios such as the debt ratio or Times Interest Earned. These ratios are discussed in our textbook, even though you may not have been assigned to thoroughly read the chapters.
Finally, please read through the rubric that will be used to grade your assignment-you will get a feeling of expectations by doing so. Your instructor is here to help you through this project. If you have questions, please let your instructor know. He or she may be willing to take a quick look at your horizontal and vertical analysis to give you feedback in advance since you will not have had much experience on that calculation prior to the project. Always communicate right away with your instructor when you need assistance!