Finance Assignment

TASK 5

Team 1:

Adetolani Adeosun

Lawrence Henderson

Ayoub Mfinanga

Brittany Raines

Matthias Wurster

Memo to CFO

Executive Summary:

ACME Iron’s current market capitalization is $412,500,000. This is roughly $287 Million or 41% less than both the industry average and our competitor. Also, our earnings per share are lower as well, likely due to a lower profit margin. This being said, our team has found several factors of ACME Iron that are outcompeting both the industry and our competitors. Our P/E ratio is about 26% better than our competitor and the industry, which means investors are optimistic for our future prospects. That being said, it is important to not grow unchecked or this faith may cause significant value loss if we lose the faith of the investors. Our MVA and EVA are both higher than our competitor and the industry. Our MVA is especially noteworthy as it is 498% and 2,366% larger than the industry and our competitor respectively. Also, ACME Iron’s EVA is higher than both the industry average and our competitor $43 Million and $59 Million respectively. This being said, ACME’s EVA is still negative, so steps should be taken to remedy this. Overall, these are excellent signs for the company and could be referenced to show value and justification for the investments made.

Analysis:

Compute the P/E ratio and market capitalization for everyone.

Compute the MVA and EVA for all.

Please see attached excel sheet for calculations.

Compare and contrast the ratios; what do the ratios convey to the investing public? How would you present these internally and externally? Make recommendations to management from your analysis.

Earnings per share (EPS) for ACME Iron is less than the industry and competitor 1 which shows that equity investors get less earnings on each share they have invested in compared to peers. The cause of this could be due to lower profitability parameters, which would need to be further evaluated. Although ACME Iron’s had the lower EPS at 0.47, the company has the higher P/E ratio at 58.55. ACME’s P/E ratio is high then the industry’s P/E ratio of 46.25, which could possibly mean the company is over hauled. Competitor 1 has a P/E ratio of 46.67 which is fairly valued to industry. ACME’s higher P/E ratio could also be due to the future outlook for ACME is positive as price is discounted future earnings and investors are optimistic. ACME has a higher capital turnover than the industry and competitor 1, which is a bad indicator that means ACME is taking more working capital to generate the same levels of sales. NOPAT for ACME is lesser than industry and competitor 1. Market Value Added (MVA) for ACME is better than industry and competitor 1. This suggests that there is effective management and robust operational efficiency. It seems as if ACME is creating better value for shareholders despite their lower EPS. Although all three (Industry, Competitor 1, and ACME) have negative Economic Value Added (EVA), ACME has better absolute EVA.

Internally, management should focus on improving the negative EVA and implement better operation parameters. Management should also discuss EPS since it is lower than their peers. The market may start understanding the overvaluation and drub the shares if ACME continues to provide EPS at this rate. This could possibly result in a decline of MVA and P/E ratios.

Externally, in order to display further interest in the company shares, ACME should assess the company’s performance to provide better value for investors. This could result in the company’s value going up and improve the MVA and P/E ratios.

Conclusion:

According to the analysis given, ACME is outperforming its competitors within the current sector. Additionally, the evaluation of ratios indicate that ACME is also outperforming its competitors, but this is an area of improvement in the current market. Despite this fact, ACME investors will rest assured that this venture is worthwhile. Current ACME owners and managers have to be compelled to review what the ratios indicate an appearance for methods to enhance their numbers within the future.