Financial literacy helps you to become a better manager. Understanding the financial side of the business will make you more effective on the job and will make your work life more meaningful. The two core activities of Financial Management are to manage profitability and manage liquidity. If either of these two activities are neglected, it can lead to the demise of an organisation. Hence, these two aspects guide the decision making for any manager. Issuing bonds (debt) and/or issuing stocks (equity), enables the corporation to manage the money it needs to finance the assets of the business. Therefore, being able to value these financial securities is also an important skill to have.
Your task is to perform the following:
1. Performance evaluation: Analyse the historical (for the last 5 years) performance of a listed company and present your findings in the form of a report, which will cover both qualitative and quantitative performance elements in a logical cohesive format.
Please note: If you are working for a company listed on the stock exchange, use this opportunity to complete the exercise on that company. Otherwise, feel free to value a competitor or a company that interests you. However, note that the company you select must be listed on a stock exchange and have a history of paying dividends.
The qualitative component of your discussion should include BRIEF background information on the company including how they are placed within the industry, and a BRIEF overview of the recent stock price movements for the company. The quantitative component should include an initial analysis of trends in the items contained in the profit and loss statements and balance sheets, followed by an analysis of important ratios measuring different aspects of the company performance: can you prepare it on a company called Lixil?
â€¢ Current ratio
â€¢ P/E ratio
â€¢ Net Profit Margin ratio
â€¢ Return on Total Assets
â€¢ Debt ratio
â€¢ Inventory Turnover (wherever relevant).
Your analysis should highlight the important changes within these ratios over this period and identify the reasons for these changes. Your analysis should include the strengths and weaknesses of the company (i.e. benchmark your chosen firm against industry averages). Taking into account the quantitative and qualitative analysis you are then required to make a recommendation on whether it will fall into one of the following two categories:
1. Invest in the company
2. Do not invest in the company.
2. Stock (Equity) Valuation exercise: You are required to calculate the value of a share of the listed company used in the performance evaluation part above, using the dividend discount model. Assume the company chosen from above has a 5% dividend growth rate and the required rate of return is 10%. Go to www.asx.com.au and find the latest share price. Compare that stock value with the current stock market price. Are there any differences? You are required to explain these differences.
Please note: In order to start this assignment you will need to extract the financial statements (comprising five years information) of your chosen publicly listed company.
We recommend you familiarise yourself with the IBIS world market research database available under the â€˜Researchâ€™ drop-down menu in the header on the student learning portal. This tool provides the financials and other company information plus industry averages.
Analyse the ratios and the other data (as requested to be calculated above) from the financial statements to evaluate the companyâ€™s operations and performance. The quality of this analysis is very important â€“ much more important than the calculation. You should focus on analysis and the implications of the analysis on the decision.
Place the ratio calculations in an appropriate appendix so that the body of the report only states the result of the calculation with interpretation (e.g. â€˜â€¦argument is supported by a debtorâ€™s collection period of 26 daysâ€™) and not the process of calculating it. Pay attention to the presentation of this appendix so that it is user friendly and it is easy to locate any ratio.
Include referencing so that you clearly acknowledge your sources of information. Your sources should include journals, books and may include articles from the financial press, financial commentators, and internet resources that you may have used to strengthen your analysis.
Remember to submit a hyperlink to the annual reports within the reference list in your assignment.