Question

After identifying 2 competing public companies you will do research to obtain the necessary financial statements (2 years) on each firm.

Most important is your “personal assessment” of what you found / learned about the two companies.

Required preparation and analysis:
A.         Common Size Statements and Analysis - Vertical and Horizontal Analysis

B.         Ratio Analysis and Analysis - Commentary based upon
            Liquidity, Solvency, Efficiency, Profitability, Market, Financial Leverage, and Coverage.           

C.        A DuPont analysis that compares the 3 DuPont identities (ratios) as a trend or as a comparison to your
            competitor – industry. This will be reviewed in class.

Answer 1

Vertical and Horizontal Analysis.

such types of analysis involves compare the profit statement/ income statement to each other in rupees and dollars and in %.

If we wants to do some some ratio analysis the best way is to do vertical and horizontal analysis.

horizontal analysis and vertical is good for internal and external stakeholder.learning of horizontal and vertical is useful for managerial accounting and other purposes.if such types of analysis founds any unexpected changes in income statement then accounting staff should find the reasons and take action on time.such types of analysis is also used for balance sheet.

Horizontal analysis.

income statement of xyz analysis. 2008 2009 changes

Sales $ 10000 $ 9200 - 8%

cost of goods sold. $ 5500 $ 5390 - 2%

Gross profit $ 4500. $ 3810 - 0.15%

wages $ 700 $ 679 -3 %

rent $ 500 $ 450 - 10%

other expenses $ 2000 $ 2100 5%

* income $ 1300 $ 581 - 44.69%

Horizontal analysis compares balances and ratio over different periods.

we compare company s sales in 2008 to 2009.

from above we can say that net income drop to 44.69% as compared to 2008 sales

wages declined by 3 % also the sales declined by 8 &.

on the other side the sales decline was $ 800.and declined the sales has huge impact on net income.

vertical analysis.

such types of analysis gives the company so much problem if cost of goods and any other expenses is too big compared to sales.

The following is example of such vertical analysis.

XYZ comapny

Particulars 2008 2009

Sales $ 1000 100% $ 750 100%

cost of goods sold $ 520 52% $ 405 54%

Gross profit $ 480 48% $ 345 46%

Wages $ 300 30% $ 217.5 29%

Rent $ 20 2 % $ 22.5 3 %

Other expenses. $ 100 10 % $ 60 8 %

Net income $ 80 $ 8% $ 45 6 %

From above analysis we can conclude that there is declined of income by 2 % as compared to sales.

Commentary based upon.

Financial leverage analysis:

such types of leverage ratio is very good for company that gives company rely on equity and debt to finance their operation and also know about debt held by company that is useful in evaluation of whether it can pay its debt.also assesses the ability of company to meets the financial duties.

Liquidity ratio:

liquidity ratio also helps the company to ability to pay debt obligation and its profit level through the calculation of current ration and quick ratio .

liquidity ratio are financial metrics used to determined ability to pay off current debt obligation.

Solvency ratio:

how to calculate such types of ratio

Net income +depriciation/short time liabilities +long term liabilities .

note: net income shall be after tax.

Efficiency ratio:

Efficiency ration shall calculated on the basis of turnover of receivables,repayment of liabilities,and use of inventory and machinery.the ratio can also used to track and analyze the performance of commercial society and banks.efficiency ratio also used to analyze how well the company uses its assets and liabilities.

profitability ratio:

so much of this types of ratio having higher value relatives to the same ratio from a previous period indicates that the company is doing good. The ratio also used to asses a business ability.

Leverage ratio:

The ratio is financial measurements that look capital flow in the form of loans.and also assess ability of person to meets all financial obligation.The leverage ratio is important to company that rely of mixture of debt and equity.