RATIOS PROJECT

ASSIGNMENT DESCRIPTION & GUIDANCE

Financial Statement Analysis

You are a financial analyst and your client has approached you for some independent financial assistance. He is considering investing funds in common shares of a corporation and has identified two alternatives. They are both in the same industry and either could be bought for book value. Your client is requesting your advice on which would be the better investment.

As a financial analyst, you will create prospectus. A prospectus is a short description of the analysis and must include the following sections:

1. Vertical analysis
2. Ratio analysis
3. Conclusions/recommendations

Section 1: Vertical Analysis (Common Size Analysis)

Perform a vertical analysis in relation to revenue for the items on theincome statement onlyfor each of the two companies.(18 marks)

Section 2: Ratio Analysis

1. Compute the ratios for the following categories for each company:
   • Profitability
   • Liquidity
   • Solvency
   • Market value Present in chart form and show the calculations used.(36 marks)
2. Discussion/comparison of ratios.(36 marks)For each ratio, you should comment on some of the following:
   • What is the relative position of each of the corporations?
   • What is being measured?
   • What does it mean? Is this good or bad news?
   • What could be causing one company to be worse off, or what may give them the advantage in this scenario?

Section 3: Conclusions/Recommendations

Draw conclusions from the data that was gathered in the previous sections and determine the relevant position of each of the corporations in all the analyses.(10 marks)

The conclusions/recommendations must address the following as a comparison between the two companies:

• Summarize the overall strengths and weaknesses of each corporation, referring to the appropriate ratios.
• Your final recommendation must include a choice for which company your client should invest in, explaining key reasons why it is the better choice.
• Extension work:What other items or areas of concern could be investigated to make a better decision?

Ratios to Use

	Profitability
Gross profit margin	Gross profit Sales Revenue (Net sales)
EBIT	Earnings before Interest & Tax - Net Income + Interest + Inc.Taxes
EBIT to percentage of sales	EBIT Sales Revenue (Net sales)
Net profit margin	Net income Sales Revenue (Net sales)
Return on equity	Net income avg Total shareholders' equity
Return on assets	Net income avg. Total assets
Asset turnover	Sales Revenue (Net sales) avg. total assets

	Liquidity (short-term)
Current ratio	Current assets current liabilities
quick ratio	(cash + s/t investments + A/R) current liabilities
DSO	(avg. A/R net credit sales) 365
ART	Net credit sales avg. A/R
Inventory days on hand	(avg. inventory CoGs) 365
inventory turnover	CoGs avg. inventory

	Solvency (long-term)
Interest coverage	EBIT interest expense
debt to equity ratio	Total liabilities Total shareholders' equity
Debt to assets	Total liabilities Total Assets
	Market value
Book value per share	(shareholders equity - preferred equity) # common shares outstanding
dividend payout	Dividends paid in a year net income
EPS	(net income - preferred dividend) wtd avg # common shares

Company Financial Statements

Bailey Ltd. Balance Sheet As of December 31, 2016		Bailey Ltd. Income Statement For the year ended December 31, 2016
Cash	$66,000	Sales *	$2,797,000
Accounts Receivable(net) ***	241,000	Cost of Goods Sold	1,790,000
Inventory	87,000	Gross Margin	1,007,000
Prepaid Expenses	12,000	Operating Expenses	770,000
Plant and Equipment(net)	792,000	Depreciation Expense	37,000
	$1,198,000	Operating Income	200,000
Accounts Payable & Accrued Liabilities	$191,000	Interest Expense	70,000
Long-term Debt	635,000	Income before Income Tax	130,000
Common Shares**	50,000	Income Tax Expense	52,000
Retained Earnings	322,000	Net Income(Loss)	$78,000
	$1,198,000	*all Sales made on credit

**Avg. common shares issued and outstanding 22,000 shares

*** A/R for 2015 was Equity for 2015 was total assets for 2015 was inventory for 2015 dividend 2016

$230,000 $310,000 $1,050,000 85,000 60,000

Snoopy Ltd. Income Statement For the year ended December 31, 2016
Sales *	$2,454,000
Cost of Goods Sold	1,594,000
Gross Margin	860,000
Operating Expenses	632,000
Depreciation Expense	31,000
Operating Income	197,000
Interest Expense	43,000
Income before Income Tax	154,000
Income Tax Expense	62,000
Net Income (Loss)	92,000
*all Sales made on credit

Snoopy Ltd. Balance Sheet As of December 31, 2016
Cash	$27,000
Accounts Receivable(net)***	262,000
Inventory	110,000
Prepaid Expenses	7,000
Plant and Equipment(net)	704,000
	$1,110,000
Accounts Payable & Accrued Liabilities	$173,000
Long-term Debt	310,000
Common Shares**	200,000
Retained Earnings	427,000

** Avg. common shares issued and outstanding 25,000 shares

*** A/R for 2015 was 230,000

Equity for 2015 was $620,000

Total assets for 2015 was 1,000,000

inventory for 2015 112,000

dividend 2016 55,000