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Discussion 1: Analysis of Financial Statements

A. This discussion assignment will allow for the completion of a ratio analysis. It will also provide information that will be useful as you prepare the written report for Assignment 1: Financial Research Report, which is due at the end of Week 9.

Step 1: Select a publicly-traded company that you will (or might) use for Assignment 1: Financial Research Report, which is due at the end of Week 9.

Step 2: Locate financial ratio data from Mergent Online. Financial statements, ratios, and other useful information are available from the Mergent Online database that is available through the Strayer University Learning Resource Center (online). Please notice that financial ratios are grouped into appropriate categories (Profitability Ratios, Liquidity Ratios, Debt Management Ratios, and Asset Management Ratios), which makes it easy to set up the ratios and use them in the analysis.

Accessing the Mergent Online Database – Financial Statements for companies, financial ratios, and Form 10K annual reports can be obtained from the Strayer University Learning Resource Center, which is accessible from the Online Classroom (see tab at the top of the screen).

Select – Learning Resource Center

Select – Databases

Select Mergent Online

Then, in the block titled “Company Search – Enter Symbol or Company Name” enter the company’s name or its Stock Ticker Symbol (e.g., for McCormick & Company, enter MKC). Next, select the company from the drop-down menu.

For Financial Statements – Select “Company Financials” tab

For Financial Ratios – Select “Company Financials” tab and “Ratios” sub-tab

For Form 10K Annual Reports – Select “Filings” tab (and then select the most recent Annual Form 10K report)

Step 3: Enter the financial ratio data into the Financial Ratio Analysis Model (the attached Excel spreadsheet). The data need to be entered into the yellow-coded cells (column is titled “Oldest Year”) progressing to the most recent year on the left (column is titled “Most Recent Year”).

The model presently contains financial information for McCormick & Company (Stock Ticker MKC).

You will note that the Excel spreadsheet model is programmed to identify if each ratio improved or deteriorated over the time period. And, the spreadsheet is programmed to calculate the percentage change in each of the ratios during the same period. This information should be helpful as you prepare your analysis.

(Note: This spreadsheet could be “imported” into the Assignment 1: Financial Research Report due at the end of Week 10.)

Step 4: Prepare an analysis and discussion of the financial ratio data that are examined in the Financial Ratio Analysis Model. It is always appropriate to include the actual ratio data in the written analysis in addition to its presentation in a table, chart or graph.

(Note: In addition to Mergent, another good source of financial data and company information is: http://www.advfn.com .)

B. From the scenario, determine two (2) financing strategies that TFC could utilize to accomplish its expansion goals. You may, for example, consider your analysis of TFC’s financial statements, as well as your knowledge of TFC’s excessive cash position. What is the rationale for your response?

NOTE: THE TFC FINANCIAL STATEMENTS ARE PROVIDED AS AN “ANNOUNCEMENT” IN THE ONLINE CLASSROOM.

File Financial Ratio Analysis Model 123014.xls (26 KB)

student post:This discussion assignment will allow for the completion of a ratio analysis. It will also provide information that will be useful as you prepare the written report for Assignment 1: Financial Research Report, which is due at the end of Week 9.

For this discussion, I decided to complete a financial ratio analysis model for General Dynamics for the years 2014 thru 2010. A financial ratio analysis consists of profitability, liquidity, debt management, asset management, and per share ratios. These ratios tell stakeholders if a company's performance has deteriorated or improve from one year to the next. This information is important to stakeholders for several different reasons. A person who is interested in investing in General Dynamics can review the company's performance ratios to make a better-informed decision. Management at a company can also use this information when deciding how they should further invest capital into their organization. So let's assume that we are thinking about investing in General Dynamics. We should begin by reviewing the financial ratio analysis that I created below to aid us in our decision.

General Dynamics Corp. (NYS: GD)



	Most Recent Year				Oldest Year	Performance From First to Recent Year;
Profitability Ratios	12/31/14	12/31/13	12/31/12	12/31/11	12/31/10	Shows Percentage Change in Ratios
ROA % (Net)	7.16	6.76	-0.96	7.49	8.25	Performance Deteriorated	-13.21%
ROE % (Net)	19.24	18.21	-2.69	19.03	20.39	Performance Deteriorated	-5.64%
ROI % (Operating)	22.78	21.86	5.12	22.72	24.05	Performance Deteriorated	-5.28%
EBITDA Margin %	14.21	13.61	4.18	13.62	13.91	Performance Improved	2.16%
Calculated Tax Rate %	29.69	31.08	161.37	31.36	30.66	Performance Improved	-3.16%
Revenue per Employee	310,070	325,188	340,856	343,607	360,733	Performance Deteriorated	-14.04%

Liquidity Ratios	12/31/14	12/31/13	12/31/12	12/31/11	12/31/10
Quick Ratio	0.95	1.19	1.07	1.1	1.01	Performance Deteriorated	-5.94%
Current Ratio	1.27	1.47	1.35	1.38	1.27	Performance Deteriorated	0.00%
Net Current Assets % TA	10.34	16.06	12.02	12.11	9.25	Performance Improved	11.78%

Debt Management	12/31/14	12/31/13	12/31/12	12/31/11	12/31/10
LT Debt to Equity	0.29	0.27	0.34	0.3	0.18	Performance Deteriorated	61.11%
Total Debt to Equity	0.33	0.27	0.34	0.3	0.24	Performance Deteriorated	37.50%
Interest Coverage	45.22	42.85	5.34	27.13	25.13	Performance Improved	79.94%

Asset Management	12/31/14	12/31/13	12/31/12	12/31/11	12/31/10
Total Asset Turnover	0.87	0.9	0.91	0.97	1.02	Performance Deteriorated	-14.71%
Receivables Turnover	3.46	3.4	3.35	3.56	3.85	Performance Deteriorated	-10.13%
Inventory Turnover	8.07	9.86	10.39	12.01	12.4	Performance Deteriorated	-34.92%
Accounts Payable Turnover	14.33	13.24	11.72	11.61	12.73	Performance Deteriorated	12.57%
Accrued Expenses Turnover	20.2	18.7	18.35	20.05	20.76	Performance Deteriorated	-2.70%
Property Plant & Equip Turnover	9.15	9.16	9.4	10.45	11.04	Performance Deteriorated	-17.12%
Cash & Equivalents Turnover	6.37	7.26	10.57	12.42	13.32	Performance Deteriorated	-52.18%

Per Share	12/31/2014	12/31/2013	12/31/2012	12/31/2011	12/31/2010
Cash Flow per Share	11.12	8.86	7.58	8.89	7.83	Performance Improved	42.02%
Book Value per Share	35.61	41.03	32.2	37.12	35.79	Performance Deteriorated	-0.50%

As of December 31, 2014, GD's return on assets (ROA) deteriorated 13.21% from 2010. GD's ROA deteriorated by 5.9% from 2013 to 2014 to 7.16. However, GD's ROA improved 604% from 2012 to 2013. The ROA industry average in 2014 was 7.18%, which suggests that GD was efficiently using its assets showing a difference of 0.16%. GD's return on equity (ROE) deteriorated by 5.64% from December 31, 2010, to December 31, 2014, but steadily improved from 2012 to 2014 showing a 616% positive move. GD's improvement may indicate that other companies in the defense/aerospace industry did not land as many contracts or generate as many sales as GD did from 2012 to 2014. The ROE industry average in 2014 was 27.5%, and GD's ROE was 19.24%.

GD's quick ratio decreased 5.94% from 2010 to 2014 and 20.2% from 2013 to 2014. The industry quick ratio average in 2014 was 0.31%, so GD's quick ratio of 0.95 for 2014 suggests that GD probably had a difficult time turning its inventory into cash in 2014. The current ratio increased 0% from 2010 to 2014 but showed a decreased of 13.6% from 2013 to 2014. GD's 2014 current ratio in 2014 was 1.27%. GD's total debt to equity has increased 37.5% from 2010 to 2014 and 22.2% from 2013 to 2014. GD's total debt to equity ratio was 0.33 in 2014, and the industry's average total debt to equity ratio was 0.63%. GD's interest coverage has increased 79.9% from 2010 to 2014 and increased 5.53% from 2013 to 2014. The industry average interest coverage ratio in 2014 was 18.42%, which was much lower than GD's interest coverage ratio of 45.22.

From the scenario, determine two (2) financing strategies that TFC could utilize to accomplish its expansion goals. You may, for example, consider your analysis of TFC’s financial statements, as well as your knowledge of TFC’s excessive cash position. What is the rationale for your response?

One financing strategy that TFC could utilize to accomplish its expansion goals would be to apply the rules of depreciation when purchasing long term assets that they intend to use over a number of years. Depreciation is a method of allocating the cost of a tangible asset over its useful life for both tax and accounting purposes (Depreciation, 2016). Depreciating assets would help during the expansion because it would give TFC more income on its profit and loss statement and increase assets on its balance sheet (Murray, 2015). A second strategy that TFC could utilize would be to do a year over year comparisons to get an idea of the direction of the company. This strategy would allow the company to address any concerns that could cause problems during this expansion.

References

Depreciation. (2016). Investopedia. Retrieved January 13, 2016, from

http://www.investopedia.com/terms/d/depreciation.asp

Financial Strength Information & Trends. (2016). CSI Market. Retrieved January 13, 2016, from

http://csimarket.com/Industry/industry_Financial_Strength_Ratios.php?ind=201

Management Effectiveness Information & Trends. (2016). CSI Market. Retrieved January 13,

2016, from http://csimarket.com/Industry/industry_ManagementEffectiveness.php?ind=201

Murray, J. (2015). 5 Ways Depreciation Benefits Your Business. About Money. Retrieved

January 13, 2016, from http://biztaxlaw.about.com/od/depreciation101/f/grosenondeprec.htm

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