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Finance Case Study Ppt Examples

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Financial ratio analysis is an important topic and is covered in all mainstream corporate finance textbooks. It is also a popular agenda item in investment club meetings. It is widely used to summarize the information in a company's financial statements in assessing its financial health. In today's information technology world, real time financial data are readily available via the Internet. Performing financial ratio analysis using publications, such as Robert Morris Associates’ Annual Statement Studies, Dun & Bradstreet’s Key Business Ratios, Moody’s Manuals, Standard & Poor’s Corporation Records, Value Line Investment Survey, etc., is no longer efficient. Since students and investors now have easy access to on-line databases, the assignments on financial ratio analysis can be modified accordingly to enhance learning. Based upon my experience as a finance professor and as a member of a local investment club, I have prepared this  teaching note to help students and investors in performing financial ratio analysis via an on-line database, Dow Jones Interactive. This database is a Web based, enterprise wide business news and research solution supported by Dow Jones & Company, the parent company of The Wall Street Journal.  The class assignment presented herein is designed to demonstrate how to assess a company's overall operations over time and its current financial standing in the industry.

THE FINANCIAL RATIO ANALYSIS ASSIGNMENT

Students will work on the assignment collaboratively in groups of three or four students. Each group will select an industry of interest to the group, and each student will select a company within that industry. Students will download the relevant financial data from the Internet and perform ratio analysis for the selected companies. Since successful financial ratio analysis is as much an art as it is a science, students must use common sense and sound judgment throughout the analysis. The purpose of this assignment is to provide students with the opportunity to:

  • retrieve real time financial data via the Web;
  • analyze the financial performance of selected companies;
  • practice communication skills, both in writing (through word processing) and in speaking (through giving a Power Point presentation);
  • enhance teamwork skills.

TREND ANALYSIS

To evaluate how the selected company is performing over time, more than one year's financial ratios are required. Students are instructed to follow the path shown below to retrieve the financial profile for the selected company via Dow Jones Interactive. (The initial steps may differ depending on how your library's site is organized.)

  • Go to the University Library home page
  • Click on ResearchResources
  • Click on Dow Jones Interactive (DJI)
  • On DJI page, click on Company and Industry Center
  • Click on Financial Profile
  • Select Region: Worldwide
  • Enter Company Symbol: ____________
  • Display as: Formatted report
  • Click on Get Report
  • Download the report including Key Financial Ratios, Balance Sheets, Income Statements and Key Competitors (see APPENDIX 1 for an excerpt Financial Profile of Intel)

Trend analysis provides signals as to whether the company's financial health is likely to improve or deteriorate. Each student will perform the trend analysis based upon the following financial ratios:

  • Leverage Ratios: to measure the extent to which the company's assets are financed with debt;
  • Liquidity Ratios: to measure the company's ability to pay its bills;
  • Profitability Ratios: to measure the company's ability to generate earnings;
  • Efficiency Ratios: to measure the company's ability to utilize its assets;
  • Market Value Ratios: to measure the market perception about the company's future prospects.

The downloaded four years' balance sheets and income statements are to be used to calculate the financial ratios not reported in the DJI. For example, four leverage ratios (Debt/Equity, LT Debt/ Cap, LT Debt/Tot Debt, and LT Debt/Tot Assets) are reported, but the interest coverage ratio (= earnings available for interest/interest expenses) is missing in the DJI. Students are required to obtain the earnings and interest expenses information from the income statements and calculate this ratio to measure the company's ability to service the debt. In the area of liquidity, current ratio (= current assets/current liabilities) and quick ratio (= quick assets/ current liabilities) are reported, but the interval measure (= quick assets/daily operating expenditures) is not. Students are required to obtain quick assets (= cash & equivalent + receivables) from the balance sheets and operating expenditures from the income statements, and calculate this ratio to measure how long the company can keep up with its bills using only existing quick assets. As the financial ratios in each of the five performance areas are compiled, they are analyzed across time. A sample trend analysis for Intel is presented (below) in Table 1. 

Table 1. Intel Trend Analysis


 

Performance Area

1998

1997

1996

1995

Trend

Leverage:

 

 

 

 

 

Debt % Tot Assets

25.7

33.2

28.9

30.6

Drop in leverage during 1998 

Interest Coverage 

269.7

395.8

318.4

195.4

Lower coverage during 1998 

Liquidity:

 

 

 

 

 

Current Ratio 

2.3

2.6

2.8

2.2

Lower liquidity since 1996

Quick Ratio 

1.0

1.3

1.6

1.3

Lower liquidity since 1996

Interval Measure (days)

63.8

90.8

115.3

86.4

Lower liquidity since 1996

Profitability:

 

 

 

 

 

Profit Margin (%)

23.1

27.7

24.7

22.0

Lower profitability during 1998

Return on Assets (%)

19.3

24.0

21.7

20.4

Lower ROA during 1998

Return on Equity (%)

26.0

36.0

30.6

29.4

Lower ROE during 1998

Efficiency:

 

 

 

 

 

Asset Turnover 

.835

.868

.878

.926

Lower efficiency since 1995

Receivables Turnover 

7.5

7.0

6.1

6.4

Increased efficiency since 1996

Inventory Turnover 

5.7

5.2

4.4

4.1

Increased efficiency since 1995

Market Value:

 

 

 

 

 

Price/Book Value 

8.41

5.92

6.37

3.83

Good market perceptions 

Du Pont Analysis

Since it is important to understand how the company's profitability, efficiency, and leverage are linked in its financial performance, students are required to demonstrate and evaluate its Du Pont system over time. The company's return on assets, ROA (=net income/assets), can be expressed as:

ROA = (Net Income/Revenue) * (Revenue/Assets) = Profit Margin * Asset Turnover

And the company's return on equity, ROE (=net income/equity), can be expressed as

ROE = (Net Income/Revenue) * (Revenue/Assets) * (Assets/Equity) = ROA * Equity Multiplier

Both the company's profitability (as measured in terms of profit margin) and efficiency (as measured in terms of asset turnover) determine its ROA. This ROA, along with the company's financial leverage (as measured in terms of  its equity multiplier), contributes to its ROE. As the company's use of leverage magnifies its ROE, students are required to examine ROE carefully. The changes in the company's ROE are to be noted and explained through its profit margin, asset turnover, and equity multiplier over time. The objective is to identify the company's strong area that can be capitalized upon and/or its weak area that must be improved upon. See Table 2 (below) for a sample Du Pont analysis for Intel. 

Table 2. Intel Du Pont Analysis


 

Item / Ratio

1998

1997

1996

1995

Evaluation

Net Income, $million 

(from Income statements)

6068

6945

5157

3566

 

Revenue, $million 

(from Income statements)

26273

25070

20847

16202

 

Assets, $million 

(from balance sheets)

31471

28880

23735

17504

 

Equity, $million 

(from balance sheets)

23377

19295

16872

12140

 

Profit Margin % 

(Net Income/Revenue)

23.1

27.7

24.70

22.0

Drop in profitability during 1998

Asset Turnover 

(Revenue/Assets)

.835

.868

.878

.926

Lower efficiency since 1995

Return on Assets % 

(Profit Margin* Asset Turnover)

19.3

24

21.7

20.4

Drop in ROA during 1998

Equity Multiplier 

(Assets/Equity)

1.35

1.50

1.41

1.44

Decrease in leverage during 1998

Return on Equity % 

(ROA* Equity Multiplier)

26.0

36.0

30.6

29.4

Sharp decline in ROE during 1998 

 

INDUSTRY COMPARATIVE ANALYSIS

To explain the variation in the company's financial ratios over time, the industry comparative analysis must be performed along with the trend analysis. To evaluate the company's financial performance against its key competitors, the company-to- company comparison report is retrieved from the following path.

  • On DJI page, click on Company/Industry Comparison Reports
  • Select Report: Company to Company Comparison
  • Enter First Company's Symbol: _____________
  • Enter Second Company's Symbol: _____________
  • Select Display as: Formatted report
  • Click on Get Report
  • Download the report (see APPENDIX 2 for a Company to Company Comparison Report for Intel)

The financial ratios in each of the performance areas are then analyzed across companies in the industry/group. Students compare their company's financial ratios with those of its key competitors and determine whether managerial or environmental factors cause the trend of the company's financial performance. To further assess the company's financial standing in its primary industry, the company to industry comparison report is retrieved. (See below.)

  • Back to DJI page, click on Company/Industry Comparison Reports
  • Select Report: Company to Industry Comparison
  • Enter Company Symbol: _____________
  • Select Compare to: this Company's Primary Industry (as identified by DJI)
  • Select Display as: Formatted report
  • Click on Get Report
  • Download the report (see APPENDIX 3 for a Company to Primary Industry Comparison Report for Intel)

The following specific industry norms are available in DJI and used as benchmarks in this analysis:

  • Liquidity: Current Ratio;
  • Leverage: Debt/Equity, Interest Coverage;
  • Profitability: Profit Margin, Return on Equity, Return on Assets;
  • Efficiency: Revenue/Assets;
  • Market Value: Price/Book Value, Price/Earnings, Dividend Yield.

Students will report on how the company performs as compared to the industry norms and where the company stands relative to its competitors in the industry. The company's weak and/or strong areas of performance must be identified and recommendations for improvement presented. See Table 3 (below) for a sample industry comparative analysis for Intel.

Table 3. Intel Industry Comparative Analysis


 

Performance Area

Intel

AMD*

Semiconductors

Evaluation

Leverage:

 

 

 

Excellent

Debt/Equity (%)

3

73

19

Low leverage

Interest Coverage

269.7

-

20.8

High coverage

Liquidity:

 

 

 

Good

Current Ratio

3.2

1.7

2.8

Above average liquidity

Profitability:

 

 

 

Excellent

Profit Margin (%)

26.1

-0.9

11.1

High profitability

Return on Assets (%)

19.3

-2.4

7.2

High ROA

Return on Equity (%)

28.9

-

14.1

High ROE

Efficiency:

 

 

 

Good

Revenue/Assets

.86

.64

.82

Above average 

Market Value:

 

 

 

Good 

Price/Book Value 

8.41

2.10

6.04

High price to book

Price/Earnings 

36.3

-

67.3

Below average PE

Dividend Yield (%)

0.2

0.0

0.1

Average 

* AMD, is one of Intel's key competitors in semiconductors industry

Go to additional Intel data.

CASE BRIEF AND PRESENTATION

To reinforce the teamwork effort, each group must submit a written report summarizing the ratio analyses of the companies in their industry. Students will work together and produce a group report that is concise and similar in style to an executive summary with no more than four typed pages plus exhibits. Each group will also give an oral presentation to brief the class on their analyses, their recommendations, and the limitations of their analyses. Charts and tables are required in the Power Point presentation.

The incorporation of computer technology in finance classes has become more popular than ever in this information technology rich environment. Mediated classrooms have grown rapidly in numbers throughout universities worldwide. This teaching note demonstrates how finance professors, business students, and investment club members can take advantage of the changing environment to enhance learning. Students can easily retrieve a company's real time financial data via the Internet and analyze its financial performance over time. The assignment presented herein is designed to help students/investors learn how to assess the company's overall operations and its current financial standing in the industry through teamwork and state of the art computer technology. It can be used in any corporate finance classes and/or investment clubs.

Bodie, Z. and R.C. Merton. Finance (2000),Prentice-Hall, Inc.

Brealey, R.A. and S.C. Myers. Principles of Corporate Finance (2000), 6th Edition, The McGraw-Hill Companies, Inc.

Brealey, R.A., S.C. Myers and A.J. Marcus. Fundamentals of Corporate Finance (1999), 2nd Edition, The McGraw-Hill Companies, Inc.

Brigham, E.F. and J.F. Houston. Fundamentals of Financial Management (1999), Concise 2nd Edition, The Dryden Press.

Brigham, E.F., L.C. Gapenski and M.C. Ehrhardt. Financial Management: Theory and Practice (1999), 9th Edition, The Dryden Press.

Gitman, L.J. Principles ofManagerial Finance (2000), 9th Edition, Addison Wesley Longman, Inc.

Keown, A., J.W. Petty, D.F. Scott and J.D. Martin. Foundations of Finance (1998), 2nd Edition, Prentice-Hall, Inc.

Ross, S.A., R.W. Westerfield and B.D. Jordan. Essentials of Corporate Finance (1999), 2nd Edition, Irwin/McGraw-Hill.

Ross, S.A., R.W. Westerfield and J. Jaffe. Corporate Finance (1999), 5th Edition, Irwin/McGraw-Hill.

Scott, D.F., J.D. Martin, J.W. Petty and A. Keown. Basic Financial Management (1999), 8th Edition, Prentice-Hall, Inc.



APPENDIX 1. FINANCIAL PROFILE


Used with permission from Dow Jones Interactive



Used with permission from Dow Jones Interactive



 

 

 

 

 


 


 


 


 


 


 


 


 

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