I would like you to add to your understanding of financial statements by having you choose a company to analyze. Pick any publicly traded company you want, find their financial statements, and pick any 5 financial ratios presented in Chapter 3 to conduct a 3 year trend analysis or a benchmarking analysis.

In the past, some students have chosen companies such as Coca-Cola, Coach, John Deere, etc. Let’s say you chose Coca Cola.

If doing a trend analysis, you would find the most recent financial statements for Coca Cola (most companies provide their financial statements on their websites) for the past 3 years. Then let’s say you chose to calculate the Current Ratio, the Quick Ratio, the Fixed Asset Turnover Ratio, the Net Profit Margin Ratio, and the Return on Equity. You would calculate those 5 ratios for each of the 3 years. Once you have your calculations, you would interpret your findings.

As an example, let’s say that once you calculate the ROE for Coca Cola over the past 3 years, you notice that the ROE is declining over time. I don’t want you to just tell me that the ratio is declining over time. This will be self-evident in your calculations. I want you to tell me it’s declining and then I want you to try to figure out why it’s declining. If ROE is declining over time, it’s possibly due to the numerator (Net income) declining, the denominator (owner’s equity) increasing, or a combination of the two. If net income has been declining over time, I want you to tell me what is contributing to declining net income over time. Think about the things that impact Net Income (a simple review of the Income Statement will make this clear for you). Did sales decrease over the past 3 years? Are costs or expenses going up? If when you calculated the current ratio, you noticed it was declining over time, was it due to declining current assets, increasing current liabilities, or a combination of the two? If current assets declined, which current assets caused this to happen (changes in cash, inventory, accounts receivable, etc.)? If current liabilities were increasing, which ones caused this to happen (changes in accounts payable, accruals, etc.)?

As evidenced above, I don’t want you to turn in an assignment where you simply say that you calculated ROE over 3 years and it was decreasing over time (without providing further explanation). If you do, you will be (seriously) penalized points. I want you to dissect what is happening to your ratios over time (this requires a thorough understanding of the ratios you’re using).

If you want to do a Benchmark Analysis, you would compare your company to the leading competitor in the industry. In the example of Coca-Cola, they are currently the leader in their industry. The benchmark competitor you would then have to choose would be Pepsi (the next best competitor). Another example of a benchmark analysis would be if you compared Bojangles to its top competitor in the industry, KFC.

When doing your Benchmark Analysis, you would calculate the 5 financial ratios you chose for Bojangles, then also calculate them for KFC (or Coca Cola and Pepsi). This is not a trend analysis, so you don’t have to do this over 3 years. You can do a benchmark analysis for 2 companies for just one year. Once you calculate the 5 ratios for each of your 2 companies, you then want to discuss why there are differences. For example, if KFC has a higher current ratio than Bojangles, you want to discuss why. Think about the components of the current ratio (Current assets/Current liabilities). Then think of what makes up each of these components. What factors are in Current Assets (inventory, cash, accounts receivable, etc.) and which are in Current Liabilities (notes payable, accruals, etc.)? Look to see how their current asset and current liability components lead to the higher current ratio for KFC.

I do not want to simply see you state that KFC has a higher current ratio than Bojangles. I want you to also be able to explain why that is.

Your analysis must be at least 2 pages (minimum) in length. When you submit your assignment, you must submit the following:

Copy of the financial statements you use (most of you will wind up using the Income statement and Balance Sheet of the company you select). You do not have to attach the entire Annual Report; just attach the statements you used for your analysis. Conversely, you can also copy and paste these reports into your write-up

Calculations of the 5 ratios you have used (do not use pre-calculate ratios; I want to see your work (formulas) for the ratios).

Explanation of the ratios

The copy of the financial statements you use will not contribute to your 2-page minimum write-up.

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