Financial Statement Analysis of Two Companies in a Specific Industry

Guidelines for Completing the Assignment

In this assignment, you will be required to select one industry sector identifying two companies in that sector. You are then required to compare the performance of the two companies you have selected within that industry by performing a financial analysis (including ratio analysis) of the simplified financial statements of these companies. (For this assignment, you should not take the accounts of an insurance company or banking organization. The types of ratios used to analyse such companies differ significantly from the standard ratios we cover).

(The purpose of this assignment is to perform a fundamental analysis of two firms in a specific industry. As we will discuss in class the investment decision is a two- stage process. In the first stage referred to as the asset allocation decision the investor has to decide based on his/her age profile, degree of risk aversion etc. what proportions of his/her portfolio he/she should optimally allocate towards equities, government bonds, corporate bonds, real estate etc. Once this is decided the next stage is the security selection decision. In the case of equities for instance this will involve deciding what industries to invest in and which specific companies in each of the industry sectors should be held in the portfolio. In selecting particular stocks, the analysis of the financial statements of companies within an industry sector is a useful starting point. This is the purpose of this assignment. You should justify your choice of industry sector in the introduction part of your report in the proposed structure outlined below.)

The following structure is recommended for preparing the report (but students are encouraged to be innovative and extend the structure where possible):

• Introduction to the firm and industry (e.g. business risk profile, growth characteristics, stage in the industry life cycle)
• Ratios: - profitability efficiency
• comparison with competitor
• Summary and concluding comments
• Detailed calculations and related backup should be included in appendices but tables can be included in the body of the report

In relation to the first four categories of ratios (profitability, efficiency, liquidity and gearing) you should look at trends over a number of years. In relation to the investment ratios you only need to look at the latest available figures.

For the purpose of completing this assignment you will find the material from the hand-out entitled “Analysing and Interpreting Financial Statements” particularly useful. You should read this hand-out prior to the seminar sessions in August.

In completing this assignment, you will also find the material covered in chapter 12 of the textbook useful as well as part of the material from chapter 13.

Note: Marks will be awarded for incisive commentary rather than simply number crunching. You may include the backup details for the calculation of your ratios in the appendices. The appendices are not included in the word count for the assignment

Yahoo Finance (Finance.yahoo.com) has excellent abbreviated financial statement information. Another good source of company financial data is the investor relations section of company websites. The investor relations section of company websites can usually be easily accessed in a web search by entering the name of the company as well as the words “investor relations”.

We will spend a certain amount of time during the first session in August discussing this assignment as well as exploring the functionality of Yahoo Finance.

Note: Please bring in the hand-out on “Analysing and Interpreting Financial Statements” to the first seminar session.

Efficient market theory argues that share prices should react quickly and in an unbiased manner to any new information. Find 6 important public announcements on various firms in recent newspapers. The announcements can be good news (e.g. earnings were higher than expected at ABC plc) or bad news (e.g. the chief executive of XYZ plc has resigned in a scandal). Use the price quotes in the newspaper to calculate the daily share price change for several days around the news announcement. (Use the difference between the return on the share and the return on the market as your measure of “abnormal” return).

(1) Do you think that the market over-reacted, or under-reacted, or reacted correctly to the announcement? Do you think the price adjusted quickly or slowly to the announcement†

(2) What is the Capital Asset Pricing Model? Analyse and critique the usefulness of the Capital Asset Pricing Model for measuring the risk/return relationship. (Students will find the material covered in chapter 7 of the text most relevant in discussing this issue. The latter part of chapter 6 on factor models may also be relevant by way of background.)

Assignments should be typed using 12 font size, Times New Roman font style and 1.5 line spacing.

Course members should familiarize themselves with the University’s policy on the late submission of coursework.