net profit margin )- gross profit margin W r i t i n g
Step 1. Collect the company’s annual report from the last three to five years including:
– Income Statements
– Balance Sheets
– Cash Flow Statements
– Notes to financial statements
Step 2. Discuss the type of business you are looking at; service, manufacturer, retailer? What is
their primary line of business? Do they have other business areas? What have you learned by
reading the annual report?
Step 3. Using the information from the financial statements, skim them to find large movements in
specific items year to year. For example, did revenues have a big jump, or a big fall, from one year
to the next? Did total or fixed assets grow or fall?”
Also, look for suspicious activity. If anything jumps out at you, research what you know about the
business to find out why an item is suspicious-looking. For instance, did the company sell off some
of its operations during the period of time you’re analyzing?
Step 4. Analyze the Balance Sheet to see if there are large changes in the company’s assets,
liabilities, or equity. Using the common-size balance sheet, discuss how the composition of asset,
liabilities and equity have changed over the three-year period.
Step 5. Examine the Income Statement to identify trends over time. Again, using your common-size
income statement, discuss changes in the income statement over the three-year period. What might
have led to these changes?
Step 6. Analyze the company’s Cash Flow Statement. Have there been large increases/decreases
in the cash balance from year to year? Have there been changes in primary sources and uses of
cash? Are the cash flows stable? Discuss how cash has been used and where it is coming from. Is
there anything in the cash flow statement that might be of concern to an investor?
Step 7. Calculate financial ratios for three years (these are the ratios from the book)
– Current Ratio
– Quick or Acid-Test Ratio
– Debt to Equity Ratio
– Times Interest Earned Ratio
– Return on Sales Ratio (also known as Net Profit Margin)
– Gross profit margin (if the income statement provides gross income)
– Return on Equity
– Return on Assets
– Earnings per Share (this is always reported on the income statement)
– Price/Earnings Ratio (also called P/E Ratio)
– Market Cap
Evaluate the changes in these ratios over the three-year period. What do these changes indicate
about the company? Are changes taking place? What? Why?
Step 8. Who are the company’s key competitors? Use more than Mergent Online to research this.
Step 9. Using the following information, get comparative ratios.
1. Using Mergent Online, create the competitors’ average ratio report. Add any significant
competitors not listed that you found in Step 8 should be added. Also, discuss any
companies you may have removed from the competitor list.
2. How does your company compare to the averages? The leaders? The poorest performers?
How do you assess your company’s performance with this information? Why?
Step 10. Create a graph of the company’s stock price and P/E ratio over the three-year period.
Step 11. Assess the sustainability of your company and its industry.