Below you will find guidance as to how to answer each question, but it is not recommended that you construct the report in terms of answers to questions.Construct the report as a comprehensive answer to the client’s request that you analyse the financial statements. Each of the 5 tasks should be answered separately, with subheadings, so the client can focus on the parts of the report that are of interest.
1. Calculate the ratios shown, for each of the last three years. Enter the values in the white cells below.
The only way to successfully calculate these ratios is to carefully work through the examples in the online materials (as well as the relevant online exercise). Don’t just look at the formulas. Make sure you can see where the numbers have come from in the worked examples.
2. Analyse the firm's performance over the last 3 years. Identify any strengths or weaknesses, in terms of positive or negative trends.It is recommended that you consider each of the 5 types of ratios separately. Use subheadings. That will make your report easier to read and comprehend. Begin with profitability ratios, and then identify, for each ratio, whether there is a clear upward or downward trend. If there is minimal change, or the figures go up and down, then there isn’t an identifiable trend. Then discuss efficiency ratios, and so on.
3. Analyse the firm's performance in comparison to industry averages for each of the ratios, identifying any apparent strengths or weaknesses. value for each ratio with the industry average, and indicate whether the firm is doing better, worse or about the same as other firms in the industry.
4. Based on your answers to Questions 2 and 3, summarise the firm's performance in terms of profitability, efficiency, liquidity, leverage and potential for investment.
Again, take each of the 5 groups of ratios separately. Give an overall indication of whether the firm is doing will or badly in terms of profitability,based on identifiable trends and by comparison with the industry averages. If all of the ratios indicate strength or weakness, say so. If the story is mixed, so say. Do the same for each category.
You should go a little beyond summarising whether the firm is doing well or badly in terms of each category of ratios. Briefly state what this means for the firm. Is it profitable and efficient in its operations How easy is it for the firm to pay its debts as and when they fall due How much debt does it carry, and how easy is it for the firm to service that debt What do the investment ratios tell you about whether the firm is an attractive investment for investors
5. Briefly explain to the client any possible problems with your analysis that the client should bear in mind.