Financial Ratios Assignment and Research Activity

Subject: Business / Finance
Question
Financial Ratios Assignment and Research Activity
Note: This activity will be submitted as Activity 2.4. However, it is recommended you begin to start work on
this activity in Module 1. Most of the content necessary to complete the assignment is provide in Module1.
Submission of the assignment will occur in Module 2. This assignment will require you to perform some analysis of financial ratios and some research to
further your understanding of financial ratios from other sources. You will select an industry and two
firms within the industry as described below and analyze the Return on Equity (ROE) of both firms and
the market valuation ratios.
To retrieve the data you will need to do the following steps:
1. Go the the Locating Company and Industry Information Research Guide:
http://guides.erau.edu/c.php?g=153738&p=1009866
2. Click on Key Business Ratios
3. Follow instructions for Mergent Online to generate report including industry and selected firms
Step Action 1 Go the the Locating Company and Industry Information Research Guide:
http://guides.erau.edu/c.php?g=153738&p=1009866 2 Click on Key Business Ratios 3 Follow instructions for Mergent Online to generate report including industry and selected firms Your submission should include a spreadsheet as described in the rubric. This should include your
selected firms as well as a summary of the industry’s ratios.
For this assignment you will be looking at a number of ratios for a firm and comparing to industry
averages. For this assignment we are going to focus on one ratio which can actually be calculated using three
other ratios. That ratio is the Return on Equity. Return on Equity can be calculated in the following
manor:
ROE = net profit margin x asset turnover / equity ratio = earnings to owners
revenues x revenues
assets / common equity
assets = earnings to owners
revenues x revenues
assets x assets
common equity look at what cancels and you are left with
earnings/equity which is ROE
ROE is comprised of:
Profit Margin (bottom line)
Turnover (asset utilization)
Equity ratio (financial cushion)
A note on equity ratio: (equity/assets)
Say a firm had $100 in assets and $37 dollars in equity
The equity ratio would be 37/100 or 0.37
What does that mean?
How can a firm be financed?
How much came from equity (owners)?
How much from creditors?
In this case for every dollar of assets, owner have funded 0.37 cents and creditors 0.63
cents.
The second set of ratios you will need to consider are market value ratios. How does the firm
you selected compare to industry averages, main competitor(s) etc.
For this assignment, you will need to select an industry using the referenced database and
download the data. Select two firms one with a relatively high ROE and one with a relatively
low ROE in the industry. Analyze each of the firms taking into consideration the components of
ROE as identified above. This will require you to do some additional research regarding ROE
analysis.
The information you will need is not all here or in the textbook. There are times in the
workplace where you will be performing or asked to perform tasks that require some
learning/teaching yourself. This assignment will require you to do that. Hints: You may want to look at each of the components of ROE and compare those. You may
want to look up (another book, online, etc) DuPont Identity or DuPont Analysis. Realize the
components you need to analyze may or may not be in the spreadsheet you download from the
referenced database. If not find what you need but make sure you document where you find
any data used. (Yahoo finance is a good site and there are others.)
Some thoughts to keep in mind:
Margins reflect the firm’s production function. If margins are low what could be done to
improve them?
Total asset turnover deals with the marketing function. If turnovers are low what might
a firm wish to consider to improve its performance?
Equity ratio is the finance province. Issues to consider are if you are being too
conservative (not employing enough cheap debt)? For your deliverable:
Include the downloaded industry spreadsheet for the industry you selected.
Identify the firms you selected within the spreadsheet by changing the color of the font for that
firm on each tab to red.
Prepare a table that calculates the ROE for each firm using the three components. Make sure
each column is labeled. (You should have columns that are labeled ROE, Net Profit Margin,
Asset Turnover, Equity Ratio) Create a similar table for the market value measures.
Write a brief paper; about two pages maximum (2 plus/minus a half page). Paper should
address the reasons why one firm has a high ROE, why one firm has a low ROE and what could
be done to improve the lower performing firm based on ROE (if it is really performing at a lower
level). Perform similar contrast and comparisons for the market value ratios.
Be sure to address issues such as marketing, asset utilization, financing and if your chosen firm

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