Financial literacy helps you to become a better manager. Understanding the financial side of the business will make you more effective on the job and will make your work life more meaningful. The two core activities of financial management are to manage profitability and manage liquidity. If either of these two activities is neglected it can lead to the demise of an organisation. Hence, these two aspects guide the decision making for any manager. Issuing bonds (debt) and/or issuing stocks (shares), enables the corporation to manage the money it needs to finance the assets of the business. Therefore, being able to value these financial securities is also an important skill to have.
Your task is to analyse the historical (for the last five years) performance of a listed company and present your findings in the form of a report, which will cover both qualitative and quantitative performance elements in a logical cohesive format.
Please note: If you are working for a company listed on the stock exchange, use this opportunity to complete the exercise on that company. Otherwise, feel free to value a competitor or a company that interests you. However, note that the company you select must be listed on a stock exchange and have a history of paying dividends.
The qualitative component of your discussion should include brief background information on the company including how they are placed within the industry, and a brief overview of the recent stock price movements for the company. The quantitative component should include an initial analysis of trends in the major items contained in the profit and loss statements and balance sheets, followed by an analysis of the following important ratios measuring liquidity, profitability, capital structure and market-value aspects of the company performance:
- Liquidity: Current ratio
- Profitability: Net profit margin ratio and Return on total assets
- Capital structure: Debt ratio and Interest cover ratio
- Market value: Price-earning (P/E) ratio.
Your analysis should highlight the important changes within these ratios over this period and identify the reasons for significant changes. Since these financial ratios are limited to the particular organisation, it is also useful to compare these ratios to other businesses in the same industry or by using industry averages.
You are also required to calculate the value of a stock (share) of the listed company selected above, using the Constant Dividend Growth Rate model. Go to your relevant stock exchange site (e.g. www.asx.com.au if using an Australian listed company) and find the latest share price. Assume the company chosen above has a 4% dividend growth rate and the required
rate of return is 9%. Compare that stock value with the current stock market price. Are there any differences? You are required to explain these differences.
Analyse and interpret the ratios and the other data with reference to the theoretical concepts introduced in this subject to evaluate the company’s operations and performance. Discuss limitations if any. Taking into account the quantitative and qualitative analysis, you are then required to make a recommendation on whether to:
- Invest in the company
2. Do not invest in the company.