Financial accounting assignment

2

Encore wire corp. (WIRE)

The Assignment

Each of you will be assigned a company (no duplicates). I’ve selected companies in a variety of industries. Most of the companies have sales of $1 billion or less, though there are a few that are bigger than that.

Your first step is to obtain a copy of the company’s most recent Form 10-K. Use an electronic copy, do not print it, they can be very long documents and most of the document is irrelevant to this assignment. You’ll likely want to print the financial statements and perhaps other information, but do so selectively. Go here to find the 10-K: http://sec.gov/edgar/searchedgar/webusers.htm . Select the most recent Form 10-K. For companies that have a December 31 year end, you should find the 10-K for the year 2013 available. If your company has a March 31 year end, the most recent Form 10-K would be for the year ending March 31, 2013. If you have problems finding the 10-K, let me know (and give me the name of the company). It’s possible a company may have been acquired, though I’ve tried to select companies that are still actively trading on the stock exchanges.

Report Contents

The premise: Your employer is considering a substantial investment in the company you are analyzing. You have two assignments: (a) make a recommendation within some fairly restrictive guidelines, and (b) prepare a forecast of the company’s income statement for the next five years (2014-2018). The report must be your original work, do not cut and paste from other documents. You should not include any quotes in your document – it is purely your own work product.

Part (a)

Part (a) must be no more than two pages long, single spaced. Use an 11 or 12 point font, 1” margins preferred.

Attach a sheet (again, not part of the two page limit) showing calculation of the ratios listed below for three years. The Form 10-K you download for the company will have three years of income statements and cash flow statements, and two years of balance sheets. For additional information, go to www.finance.yahoo.com. In the upper left corner of the page is a space to enter the ticker symbol for your company. Once you’ve reached information about your company, on the left side of the page, near the bottom, are financial statement links. You may obtain information you need from that source. You will likely need three years of balance sheet information, which may not be available in the Form 10-K.

Your report should address the following (within two pages):

1. Overview of the company. Briefly describe the company and answer the question, “How does the company make money?”

2. Identify one or two main competitors (information that is usually provided in the 10-K).

3. Analyze the financial statements. This data will be shown on the attachment to the report (the attachment is not part of the two pages).

a. Return on assets (ROA) – calculate for three years (you’ll need additional balance sheet information).

b. Return on stockholders’ equity – calculate for three years.

c. Earnings per share – show for three years (the calculation is done in the annual report; you do not need to show any calculation).

d. Accounts receivable turnover – calculate for two years (ignore if the company does not have accounts receivable).

e. Expense ratios – for the two largest expenses (cost of goods sold, for example) calculate the expense as a percent of sales, for three years.

f. Gross profit ratio (if it applies, it doesn’t for all companies) – for three years.

g. Percent change in net sales – for three years.

h. Percent change in operating income – for three years.

i. Percent change in net income – for three years.

j. Current ratio – for two years.

k. Operating cash flow to current liabilities – for two years (calculate as a percentage).

l. Long-term debt to stockholders’ equity – for two years.

m. PE ratio (you can obtain this from a variety of sources (Yahoo Finance) – most recent – and the PE ratio for the one or two competitors you identified earlier.

The results of your analysis should be included in a table (that is appended to the report) and should look something like this.

2011 2012 2013

Return on assets x.x % x.x% x.x%

Accounts receivable turnover x.x x.x x.x

If a ratio is meaningless for your company, don’t include it (if they don’t have long-term debt, for example). You may include other ratios if you wish.

4. Incorporating some (not all) of the ratios and other information you obtain, conclude whether or not we should invest in this company. And, within the confines of a two page report, explain why you reached that conclusion. (Don’t forget to make a recommendation.)