Review the most recent annual reports for each of the two companies to gain an understanding of each company’s products and services, the markets they serve, and their financial performance.
Complete a financial analysis to determine which of the two companies is the better performing by looking at the most recent full-year financial reports.
A good performing company is one whose returns are better than the industry average over a long period of time. Look at a metrics such as return on invested capital, free cash flow, sales growth, profit growth, and return on assets).
A company with superior financial performance, generally has consistent annual revenue and profit growth; high profit margins; high sales per employee; high sales per square foot of floor space (retail or manufacturing); high inventory turns, and a strong balance sheet.
Good financial performance is the result a good business strategy that is executed well and often includes: investments in appropriate technology; visionary leadership; talented and dedicated employees; a customer focus; having and maintaining a competitive advantage, and a strong focus on strategic goals.
Based on your conclusions from the facts as presented, explain why the better company achieves better performance than its competitor. What does the company do well to achieve the superior financial performance? What can they improve on to even do better?
EXAMPLE OF FINANCIAL ANALYSIS:
|Metric||Company 1||Company 2|
|Return on Assets||8.57%||6.22%|
|Return on Equity||23.0%||36.6%|
|Debt to Equity||0.71||2.11|
|Return on Invested Capital||18.6%||21.7%|
|Earnings Growth (3yr. avg.)||-1.7%||+15.4%|
|Revenue Growth (3 yr. avg.)||4.2%||2.7%|
|Free Cash Flow||$7.4 bn||$0.86 bn|
Company 2 has overall better financial performance as its Return on Invested Capital is 21.7% compared to 18.6% for Company 1. If you were a shareholder, your return potential would be better with Company 2. Company 2 also does a better job in managing its inventory and has more productive employees (sales per employee). Company 1 has better asset utilization with higher sales per square foot. Company 2 has more productive employees with higher sales and net income per employee.
Company 1 does better in profit margins and operating margins and sales per square foot, and generates more free cash flow.
Company 2 is faster growing in earnings (15.4% per year), and does a much better job with inventory turns (15.0 vs. 8.3). If Company 2 could lower their floor space or increase their sales with the same floor space, they would improve their sales per square foot and thus improve their profit margins. This would also help generate more free cash flow as it would reduce the investment required in facilities.
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