Financial analysts must evaluate the performance of the company and compare that performance over time. One way to evaluate the financial performance of a company is to calculate financial ratios. Ratios can be used to assess a company’s profitability, liquidity, efficiency, and financial risk (leverage). Changes in these ratios over time can alert a financial analyst to poor management or strong shareholder returns. For this discussion, you will calculate some common financial ratios for your chosen publicly traded company.

**Prepare:**

Prior to beginning work on this discussion forum,

- Read Chapter 11 of the
*Essentials of finance*.- Specifically review the “A Closer Look” feature box in Section 11.3.

- Complete the Week 2 – Learning Activity.
- Make sure you have completed the Week 1 – Assignment 1.

**Calculate:**

- Calculate two ratios for your chosen company, according to your last name and the list below. Using Appendix A from Week 1, calculate the ratios for your chosen company for the two most recent years available in the financial statements.
- Last names A through C: Return on assets (ROA) and return on equity (ROE).
- Last names D through F: Long-term debt to equity ratio and interest coverage ratio.
- Last names G through I: Gross profit margin and net profit margin.
- Last names J through L: Current ratio and quick ratio.
- Last names M through O: Inventory turnover and receivables turnover.
- Last names P through R: Days sales outstanding and days inventory outstanding.
- Last names S through U: Book value per share and price-to-book.
- Last names V through Z: Earnings per share and price-earnings (P/E) ratio.

Need help with your calculations? Check out the videos included in this resource: *Week 2 Discussion Help (Links to an external site.)*.

**Write:**

In your initial discussion forum post,

- Create a table within your discussion post that includes the following information:
- the financial data used to calculate each ratio in the 2 years for your chosen company
- the last 2 years (clearly labeled)
- the calculations and the concluded ratio
- Need help making a table? Review the
*How So I Insert a Table Using the New Rich Content Editor as a Student? (Links to an external site.)*

- Need help making a table? Review the
- Explain what your two ratios measure.
- Attach your Appendix A (that you completed in Week 1) to your discussion post so that other students can review your data and calculations.

**Guided Response: **Review several of your colleagues’ posts, and reply to at least two of your peers by 11:59 p.m. on Day 7 of the week. You must respond to two classmates who have calculated** different ratios than you.** In your written responses to your classmates, address the following:

- Using the included Appendix A provided by your classmate, confirm the calculated ratios or explain a correction to the calculated ratios in the initial post.
- Provide the calculations for one additional ratio for their company for the 2 most recent years. Choose the ratio from the list of ratios for this discussion.
- Identify which ratio you are calculating, and provide the financial data used for the ratio as well the concluded ratio.

- State whether or not you believe this additional ratio shows another financial strength for the company or if it shows a weakness for the company.

## Historical Financial Statements: Appendix A [WLO: 3] [CLO: 1]

Any equity research report will include the historical financial performance of the company. The financial statements form the basis of facts for the company and those facts contribute to the determination of the buy, hold, or sell investment recommendation. For this *assignment*, you will use the Mergent database through the university library to retrieve 3 years of financial statements (i.e., the income statement, balance sheet, and statement of cash flow) for your chosen publicly traded company that pays dividends. You should use the same company you picked for your Post Your Introduction *discussion* *forum*. Then you will format that financial information using a spreadsheet program like Excel. The video below explains how to format your company’s financial information.

Title this *assignment* “Appendix A.” Be sure to save both formats (Excel and PDF) of these files for later use.

**Note**: You will use all of the assignments in Weeks 1 through 4 for your Week 5 *final* project for this *course*.

**Prepare:**

Prior to beginning work on this *assignment*,

*Complete*the Week 1 – Learning Activity in Amplifire .- Select a publicly traded company that pays dividends (per the instructions in the Week 1 – Post Your Introduction).
- Review the
*BUS401: Principles of Finance Research Guide**.**Review the Excel resources in the**BUS401: Principles of Finance Research Guide**.*

- Watch the following video that will help you format the financial statements for Appendix A:

*Retrieving Financial Statements Using Mergent* *(Links to an external site.)*

**Research:**

Using the Mergent database in the university library,

- Find your chosen dividend-paying company within the Mergent database.
- Follow the instructions in the video above to retrieve and format the 3 most recent years of historical financial statements (income statements, balance sheets, and statements of cash flows).

**Construct Appendix A:**

- Retrieve the 3 most recent years of historical financial statements (income statements, balance sheets, and statements of cash flows) for your chosen company using Mergent. Then using a program like Excel, and based on the instructions in the
*BUS401 | Retrieving Financial Statements Using Mergent**(Links to an external site.)*video.- Format the income statement.
- Format the balance sheet.
- Format the statement of cash flows.

- Save this Excel file as a PDF and title it “Appendix A.”

**Submission****Format:**

*Submit*the PDF version of Appendix A to Waypoint.

Historical Financial Statements: Appendix A PDF file

- Must contain the formatted income statement, balance sheet, and statement of cash flows for a company that has paid dividends for the last 4 to 5 years.

## Section : Financial Statement Analysis [WLO: 5] [CLOs: 1, 2]

In order to determine if you can recommend buying or selling a stock, you first must understand how the company has performed recently. Would you want to invest in a company that has had negative earnings for the past 3 years? What about a company that has increased the amount of debt on its balance sheet? Or, would you prefer to invest in a company that has had consistent increases in revenues or net earnings over the past 3 years? As the equity analyst, your first task would be to determine the evidence of patterns in the recent financial performance. The financial analysis provides significant insight into the company’s strengths and weaknesses.

To fully understand a company’s financial performance, you cannot “evaluate performance using numbers alone. This level of analysis does not involve an understanding of the cause of performance…an analyst must look beyond the numbers” (Hickman et al., 2013, Section 11.3, para. 7). In the real world, an analyst spends extensive time and effort researching the business strategy, operations, marketing, and other elements that have contributed to this financial performance. For this class, you will limit your investigation of the company to the historical financial analysis, ratio and competitive analysis, and the valuation of the stock. This Week 1 *assignment* will become Section 1 of the Week 5 *final* project.

**Prepare:**

Prior to beginning work on this *assignment*,

- Review the Week 1 Model
*Assignment*(Links to an external site.). - Make sure you have completed both Week 1 –
*Assignment*1 and Week 1 –*Assignment*2. It is recommended that you keep those Excel or PDF documents available when completing this*assignment*. *Complete*the Week 1 – Learning Activity*.*- Review Chapter 2 and Section 11.3 from Chapter 11 in the textbook.
- Review the Week 5 –
*Final*Project for this*course*.

**Write:**

For this *assignment*, address the following seven parts in a Word document:

**Part 1: Overview of the company** (one paragraph)

- State the name of the company.
- Provide a brief overview of the company you selected, including a description of its business operations.
- State the current market price per share.

**Part 2: Income statements** (one to two paragraphs)

- Summarize key trends in revenues, operating income, and net income over the last 3 years.

**Part 3: Common size income statements** (one paragraph)

- Evaluate the trends in gross margin, operating income margin, and net profit margin over the past 3 years.

**Part 4: Balance sheets** (one to two paragraphs)

- Summarize key trends in total assets, total current assets, total current liabilities, long-term debt, and total shareholders’ equity over the past 3 years.

**Part 5: Common size balance sheets** (one paragraph)

- Evaluate the trends in total current assets as a percent (%) of total assets, total current liabilities as a percent (%) of total assets, long-term debt as percent (%) of total assets, and total shareholders’ equity as a percent (%) of total assets over the past 3 years.

**Part 6: Cash flow** (one paragraph)

- Calculate simple cash flow for the past 3 years.
- Show your calculations.

- Summarize the trend in simple cash flow for the past 3 years.
- Compare the simple cash flow to the net operating cash flow from the statement of cash flows for the past 3 years.

**Part 7: Financial analysis conclusion:** (one paragraph)

- Determine the strengths and weaknesses of the company based primarily on the trends in items discussed from the income statements, balance sheets, common size income statements, and common size balance sheets, as well as the comments on cash flow.
- Create a table that indicates whether each financial fact is a strength or a weakness.
- Determine the overall financial strength of the company based on the financial facts included as strengths or weaknesses.
- Categorize the overall financial performance of the company as strong, neutral, or weak.
- Justify your conclusion based on the table you created.

The company I am using is Best Buy Co., Inc. (BBY), and I have calculated the gross profit margin and the net profit margin for the years 2020 and 2021. In the table below, you can see my calculations. To calculate gross profit margin we divide the gross profit by the revenue for a specific period (obtained from Appendix A).*scale in thousands***20202021**Gross Profit$10,048,000$10,573,000Revenue$43,638,000$47,262,000**Gross profit margin0.23 (23%)0.22 (22%)**

The gross profit margin measures the “…product pricing in comparison with its basic cost” (Hickman et al., 2013). It is usually shown as a percentage of net sales and is commonly used to compare a company’s “business model” with competing companies (Bloomenthol, 2021).

The net profit margin is calculated by taking the company’s net income and dividing it by the revenue or sales for that fiscal year (also retrieved from Appendix A). Net profit margin measures the amount of earnings per dollar of sales (Hickman et al., 2013). In the following table we can see the balances used and the calculated net profit margin, which is typically reported as a percentage of revenues.*scale in thousands***20202021**Net Income$1,541,000$1,798,000Revenue$43,638,000$47,262,000**Net profit margin0.035 (3.5%)0.038 (3.8%)**

In 2020 and 2021, Best Buy earned roughly $0.04 per dollar of sales.

*References*

Bloomenthal, A. (2021). *Gross Profit Margin*. Retrieved from https://www.investopedia.com/terms/g/gross_profit_margin.asp#:~:text=Gross%20profit%20margin%20is%20often%20shown%20as%20the,costs%2C%20which%20is%20the%20firm%27s%20net%20profit%20margin.

Hickman, K. A., Byrd, J. W., & McPherson, M. (2013). *Essentials of finance*. Bridgepoint Education

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