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Financial Analysis.

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:

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Financial Comparisons
Metric Company 1 Company 2
Profit Margin 4.39% 1.45%
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%
Inventory Turns 8.3 15.0
Sales/Square Foot $437 161
Sales/Employee $218,400 $277,328
Net Income/Employee $6,876 $7,243
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.

 

 

  1. The APA writing style format uses 12 pt. font size, Times New Roman type style, double-spacing, and requires a title page, title headings for sections of the paper, citation of references used in the body of the paper, and a separate references page at the end of the paper.

 

  1. The length for papers is to be between five and seven pages (excluding title page, abstract, and reference page). Papers generally shorter than this do not adequately cover the topic.

 

  1. An abstract is required for all papers, and should include statement of problem or issues that the paper addresses; the method of analysis; the results or findings; and main conclusions and recommendations. Abstracts should be brief but complete.
  2. All papers must include a minimum of four (4) appropriate and credible outside references. The course textbook can be one of the references if it is used. Sources need to be credible and copying from sources is not permitted. If material is quoted directly from a reference source, the source must be cited in the body of the paper as well as on the reference page.

 

  1. Examples used to illustrate points in papers should not be taken from the course textbook or from any previously ones used in class or from other class assignments.

 

  1. All papers should have section headings for each of the major sections of the paper, and include as a minimum of an introduction (explaining the purpose of the paper and how the topic will be covered); an analysis section or sections, detailing the analysis of the case, the topic, or the problem; a conclusions section where the conclusions are made based on the analysis; and a summary section, where the key points of the paper and any conclusions drawn in the paper are summarized.
  2. Make sure that the hyperlinks are removed from any web sources on the reference page and in the body of the paper, and that the papers are spell and grammar checked before submitting.

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