Project details:This is a short project to let you apply all that you learn in the course. If you gather and analyze information concurrently with the material you learn, it may make it easier to interpret. Plan to spend about 1-2 hours a week on the project, which will make it easier to complete, rather than leave everything to the end which will make it near impossible to complete.

“It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” Warren Buffett

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Ideally, all investors and firms making decisions on financing and investing believe that they are making informed decisions. If this is true, there would be only winners in the markets and all investors/firms would make winning decisions, but that is clearly not the case.  It would be excellent to have firms/investors to be information-driven and not be just driven by market swings. In addition, it is not just having access to information but being able to interpret and make sound investment and financing decisions that makes a difference, but practice tells us that this is not the case many of the time. Sieving through a myriad of information and collate, summarize and interpret this information for decision making is a daunting and tedious task and requires careful analysis.

This raises several questions: What should aninvestor-centric analysis look like?What are the building blocks of aninvestor-centric analysis?

One of the key focus areas is for students to appreciate how financial data is collated and analyzed. You cannot analyze numbers in a vacuum and numbers by themselves (such as from financial statements) for any given year do not mean much unless patterns and interconnectedness are observed that indicate the company’s underlying business strategy and past and future decisions. Financial indicators vary from industry to industry; the ratios can only be interpreted when compared and contrasted with other companies in that industry.  Financial analysis is something of an art form.  Experienced managers such as Warren Buffet, George Soros to name a few, are investors and analysts who develop a data bank of information over time, and after analyzing many companies across industries, they can identify intuitively and after much research, undervalued firms.

This project provides an opportunity to get some hands-on experience applying some of the concepts in corporate finance theory to real firms. In the process, you will get a chance to

(a) understand the ownership patterns of a firm
(a) evaluate the risk profile of a firm, and examine the sources of risk.
(b) analyze its capital structure, and decide whether the firm is under or over leveraged.
(c) examine its dividend policy, and decide whether more or less should be paid in dividends

(d) Evaluate a company’s free cash flows and determine how they are interpreted.

(e) Evaluate a company’s ratios and determine how to use them to evaluate a firm

(f) Collate and analyze Research Analysts’ reports and other data on your firm and understand how to interpret and use them in valuing a firm.

These are some basic steps that you may use to do for the analysis but please understand a couple of issues.

Given the constraints of time and data, this is not by any means an exhaustive list. There are other more detailed steps that will be needed to get deeper into the meaning of the numbers. This is just a first step in that direction.

Step 0: Pick a company of your choice and post your choice on the Discussion Board for Picking Firms for Projects and state your firm’s name that you plan to study in the subject line so that other students may not choose the same company. It will be a first come, first serve basis for choice of company.

Step 1:  Find information about your company from yahoo finance, cnn money, google finance etc including ratios, betas and any other type of information that may help you understand the company you are analyzing. You do not calculate anything but gather data.

If you want, you can also acquire the company’s financial statements for the past three years from a company’s website or their recent annual report; in the company’s 10K filing on the SEC’s EDGARdatabase; or from other sources found at the library.  As a minimum, get the following statements, for at least 3 years.

  • Annual Report
  • Balance sheets
  • Income statements
  • Shareholders equity statements
  • Cash flow statements

Step 2:  Quickly scan all of the statements to look for large movements in specific items from one year to the next.

Create an excel sheet summarizing important financial information (not every asset/liability/equity item) from which you can glean patterns.

For example, did revenues have a big jump, or a big fall, from one particular year to the next?  Did total or fixed assets grow or fall?  If you find anything that looks very suspicious, research the information you have about the company to find out why.  For example, did the company purchase a new division, or sell off part of its operations, that year?

Step 3:  Review the notes accompanying the financial statements for additional information that may be significant to your analysis.

Step 4:  Examine the balance sheet.  Look for large changes in the overall components of the company’s assets, liabilities or equity.  For example, have fixed assets grown rapidly in one or two years, due to acquisitions or new facilities?  Has the proportion of debt grown rapidly, to reflect a new financing strategy?  If you find anything that looks very suspicious, research the information you have about the company to find out why.

Step 5:  Examine the income statement.  Look for trends over time.  Calculate and graph the growth of the following entries over the past several years.

  • Revenues (sales)
  • Net income (profit, earnings)

Are the revenues and profits growing over time?  Are they moving in a smooth and consistent fashion, or erratically up and down?  Investors value predictability, and prefer more consistent movements to large swings.

For each of the key expense components on the income statement, calculate it as a percentage of sales for each year.  For example, calculate the percent of cost of goods sold over sales, general and administrative expenses over sales, and research and development over sales.  Look for favorable or unfavorable trends.  For example, rising G&A expenses as a percent of sales could mean lavish spending.  Also, determine whether the spending trends support the company’s strategies.  For example, increased emphasis on new products and innovation will probably be reflected by an increased proportion of spending on research and development.

Look for non-recurring or non-operating items.  These are “unusual” expenses not directly related to ongoing operations.  However, some companies have such items on almost an annual basis.  How do these reflect on the earnings quality?

If you find anything that looks very suspicious, research the information you have about the company to find out why.

Step 6:  Examine the shareholder’s equity statement.  Has the company issued new shares, or bought some back?  Has the retained earnings account been growing or shrinking?  Why?  Are there signals about the company’s long-term strategy here?

If you find anything that looks very suspicious, research the information you have about the company to find out why.

Step 7:  Examine the cash flow statement, which gives information about the cash inflows and outflows from operations, financing, and investing.

While the income statement provides information about both cash and non-cash items, the cash flow statement attempts to reconstruct that information to make it clear how cash is obtained and used by the business, since that is what investors and creditors really care about.

If you find anything that looks very suspicious, research the information you have about the company to find out why.

Step 8:  Find information about your company from yahoo finance, cnn money etc including ratios, betas and any other type of information that may help you understand the company you are analyzing. You do not need to do as much calculating as much as gathering of data.

  • Obtain data for the company’s key competitors, and data about the industry.
  • Review the market data you have about the company’s stock price, and the price to earnings (P/E) ratio.

Try to research and understand the movements in the stock price and P/E over time.  Determine in your own mind whether the stock market is reacting favorably to the company’s results and its strategies for doing business in the future.

  • Review the evaluations of stock market analysts.  These may be found at any brokerage site, or from various locations on yahoo, cnnmoney and other finance sites.

Step 9:  Review all of the data that you have generated.  You will probably find that there is a mix of positive and negative results.  Answer the following question:

“Based on everything I know about this company and its strategies, the industry and the competitors, and the external factors that will influence the company in the future, do I think this company is worth investing in for the long term?” Explain why based on the data that you present.

Step 10: Summarize all the information in no more than a 1-3 page written report and an appendix of tables.



FINAL PROJECT DUE (check syllabus)– HARD DEADLINE as I need time to grade projects.


KEEP IN MIND THAT YOU HAVE A STRICT PAGE LIMIT ON THE FINAL REPORT of no more than a 1-3 page written report and an appendix of tables. It has to 1.5 spaces and 12 point font!

For Project:

I want to see the data and other information that you have gathered under each section/subsection (you can include the financials etc in a separate document/file). The analysis does not need to be completed till the final report. Also, put the relevant data gathered in each section based on how you plan to structure the report. You can use the outline I have suggested below or use the Sample analyst reports that are available under the ‘Project’ Moduleor make your own. If you are working with someone, I need to also get a listing of who is doing what portions of the project.

Below is a Suggested Outline for FINAL REPORT (this is optional, and you are free to choose an alternative way of presenting the information if you so choose).

  • A summary of the company would be useful – see the Analyst reports posted under the ‘Project’ folder to see what is typically included.
  • Business Description: I would start with a brief description of the business and its divisions/segments. This should also include any positive or negative news (old and recent) (in a couple short paragraphs). Any merger/divestitures in the recent three years is useful since that would impact their performance.
  • Leadership – discuss management and board composition briefly and also stability/instability of the leadership. Again, any changes in the last 3 years or so would be useful and discuss in a sentence or two if it has impacted their value.
  • Macroeconomy: Introduce a section on the economy (issues that may impact the industry- regulations, accounting policies, geopolitical issues etc, interest rates etc), Industry, Competitors and the firm’s positioning (by division, if need be). Often a table would help here to keep it succinct.
  • Investment summary – stock price trends, returns summary, valuation information, risk information (Again a table may be useful here).
  • Financial statements – summary trends in sales, profits, free cash flow etc, and comparison to peers. (Table would be useful)
  • Financial Analysis – Ratios – breakdown by category.
    1. Break down the ratios and do not forget to always connect things back to the financial statements (grassroots level). Discuss the quantitative trends and comparisons to industry by profitability, liquidity, asset management, debt management and market value and discuss how the firm is doing in each of these areas and if the firm is profitable or not how you can tie it to back to some or all of these areas. Flag problem areas and strengths in each area. Also use trend analysis and industry and if you know of the competitors, compare it to the closest two if possible.
    2. I would look at the free cash flow as well to see if the firm has enough free cash flow and what it is planning to do with it (you may find it in manager or president’s messages on the firm’s website).
    3. Since it is a bank that is evaluating the loan, they would look at bond ratings and credit risk information which is always useful which you may want to add that to debt management. Banks do look at TIE very closely and Total debt ratio as well as those indicate credit risk.
    4. Finally, use DuPont analysis to tie things together and develop your story as to why profitability is good or bad by starting with ROE and breaking it down using the information above in Section a.
  • Conclusion: Using information from above, summarize the firm’s strengths and weaknesses both quantitatively and qualitatively.
    • Decision: Would you approve or disapprove the loan? Explain briefly why using your analysis.

 All Tables can go into Appendix if need be. All supporting documents should be provided in the appendix (can be in a separate excel file if need be). 

The librarian sent me these links to library resources:

Nexis Uni (Formerly LexisNexis Academic) — Nexis Uni™ features more than 15,000 news, business and legal sources from LexisNexis. To locate company profiles in Nexis Uni, select Company Info, enter the company name, and from the drop-down menu select SEC Filings.

Mergent Online — Select D&B Private Company Database to begin searching for Private Company information.

EDGAR Database via SEC

EDGAR, the Electronic Data Gathering, Analysis, and Retrieval system, provides free access to full-text of U. S. public corporation documents filed with U. S. Securities and Exchange Commission, including 10-K and 10-Q reports.

Value Line Investment Survey — The Value Line Research Center provides online access to Value Line’s leading publications covering stocks, mutual funds, options and convertible securities as well as special situation stocks.

Yahoo! Finance
Yahoo! Finance provides extensive stock information, business and earnings announcement summaries, and financial statistics and ratios for over 9,000 publi

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