Part 2:
Financial Statements with Year/Year change between the columns for Current and Prior years, utilize Bloomberg and download Income Statement in Adjusted and Balance Sheet and Cash Flow Statement in Standardized version.
• Identify the Auditing firm for your Financial Statements.
• Income Statement (Bloomberg Source only)
• Balance Sheet (Bloomberg Source only)
• Cash Flow Statement (Bloomberg Source only)
Detailed Financial Statement analysis. Utilize the 10K to identify the changes
Definition of Detailed: having many details or facts; paying attention to detail
• Income Statement
o Detailed Analysis of line changes (Include Revenue breakdown, Effective Tax tables, both from 10K Report)
• Balance Sheet
o Detailed Analysis of line changes
• Cash Flow Statement
o Detailed Analysis of line changes
Ratios: Get data from Bloomberg or Morningstar (other financial websites).
• Year to Year Ratio analysis of Firm (all nine ratios assigned), explain why changes occurred, could be same reasons from Financial Statement Analysis (that is fine).
• Year to Year Ratio Analysis of TWO Peers selected vs Firm and Peers
• There is no need to write the definition of the ratio and how it is calculated.
• Refer to “How to Analyze Ratios” below
• Utilizing Ratio Analysis explain the following:
o Cost Control by firm and Peers (Margins)
o Financial Structure changes (ROE, ROA, D/E)
o Liquidity (Current, Quick, ITO)
Projections: Gather the following data for Firm from the past 5 years:
Revenues
Gross Margin
Operating Income
Net Income
Also, calculate the Effective tax rate for Projected year (utilize the 10K to examine Effective tax rates from the most recent years to get the estimate), and analyze to see if there will be any variation to that rate for Projected year.
Calculate a Sustainable Growth Rate for firms with Dividend payouts and compare that to the Geometric Growth rate of Dividends over the past 5 years. Is the Dividend payout sustainable?
If firm does not pay dividends calculate a growth rate utilizing the Residual Income Method or Free Cash Flow calculations.
Calculate an estimated geometric growth rate for each of these statistics (Margins) to project their future growth. Prepare a projected Income statement for Projected year. (Recent Year / Recent Year – 5-years) ^1/4 (power) – 1 = Growth rate to be used for the four items listed above. Data for this is in 10K.
The Projection for the Income Statement should be nine lines:
• Revenues = Projected year = Recent Year x (1+ geometric growth rate from above)
• COGS = Revenues – GP = Projected year
• GP = Projected year = Recent Year x (1+ geometric growth rate from above)
• Operating Expenses = GP – Operating Income = Projected year
• Operating Income = Projected year = Recent Year x (1+ geometric growth rate from above)
• Other Expenses = Projected year = Operating Income – EBT
• EBT = NI/ (1 – Estimated Tax rate) then calculate Other Expenses
• Taxes use the projected tax rate you discovered for Recent Year and assume it will be the same for Projected year
• Net Income = Projected year = Recent Year x (1+ geometric growth rate from above)
Based on the projection, calculate any additional assets and funding needed for Projected year. Use a condensed Balance sheet:
• Current Asset Total Current Liabilities
• Fixed Asset Total Long Term Liabilities
• Total Assets Total Liabilities
Shareholder Equity
Total Liabilities/Shareholder Equity
• Step 1: Calculate the Projected Income Statement
• Step 2a: Take Net Income and subtract Dividends paid for Projected year. Dividends can be checked on any Financial Website. Current Forward Dividend multiplied by Shares Outstanding or Payout Ratio is the percent paid.
• Step 2b: Amount of Money being spent on Repurchase Program, subtract from Step 2a.
• Step 3: Add that amount to Shareholder Equity, Retained earnings.
• Step 4: balance the Balance Sheet, increase Assets by the increase in Equity.
• Step 5: How do I know if it is additional Current or Fixed Assets? Keep the same percentages as the previous year.
• Step 6: Now Calculate TATO for Projected Financials, does it fall in the same range as the previous year? If so, you are finished. If TATO increases substantially, you need more Assets, and more debt. Utilize a percent of sales strategy to calculate additional assets, then allocate to liabilities.
• If you need more assets, you will need to increase debt levels to balance.
• Show all calculations made for these steps as Assumptions for the Projection of the Balance Sheet.
• Update Benchmark graph
• Update Beneficial Owners table
• Analyze in detail all insider transactions, who are the insiders? And the influence the investor may perceive.
• Analyze Short Sales for the past 6 months and its indications. Look at detail of trades.
• Analyze open Option Interest for the firm, what is the significance?
• Significant news this semester. The effect on your investment.
• Updated Assessment
• Fund:
o Holdings analysis: impact of positions on performance of the fund. Changes in performance rankings during holding period, why?
o Peer Analysis
Category Rank for three funds (selection and two peers)
Holdings: Top Ten and Make-up
Sector Breakdown comparisons, among peer group.
Performance of peer group
Ratios compared among peer group include Beta
Expenses of peer group and compare
Analysis of performance based on the Top 10 holdings.
Which peer is the best choice? Why?
• Update your assessment of your selections (place at the end of Part 2, in each section).
Take one of the stocks from your investment portfolio of the Class Project. What is its P/E ratio? Compared with stocks of companies that are in the same line of business, is your stock over-priced or under-priced? Explain.
Look up the ROE and ROA of the firms in your portfolio and also find the ROE and ROA of their direct competitors. Discuss the differences and why you think these differences exist.
Take one of the stocks in your portfolio and find the current bid-ask spread as well as the order size for the bid and ask, during the trading day, get a time stamp and show summary page from source, review the daily volume in relation to the average volume. Discuss the consequence of these numbers for the risk of the firm. Where is the stock’s price in relation to its 52 week activity?
