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Required Reading:2016 R June Financial Statement

Required Reading:
2016 R June Financial Statement Analysis Power Point with notes
2016 July DMBA R Sample Week 3 Answer
*"Research Starters: Financial Ratios" posted in this week's Content Module
Required Multimedia:
The Cash Flow Statement http://www.youtube.com/watch?v=­eietCf5nNI&feature=related
Cash Flow Ratios http://www.youtube.com/watch?
v=vzdNgaPhBMQ&feature=PlayList&p=84588A1A1F1F96D1&index=15
Market Ratios http://www.youtube.com/watch?v=K1WmGQLIwTY&feature=related

Recommended Support Materials:
For a "how to" explanation of Financial Statement Analysis: see the attached Power Point file 2016 R
June Financial Statement Analysis and the Word file, "Diagram of Financial Ratios."

Assignment Financial Statement Analysis:
Your team has been assigned to the CEO of a major company. The CEO keeps an eye on the
competition, and asks your team to do the following: Following the 2016 R DMBA Sample Week 3
Answer, use ratio analysis to compare two major competitors in the same industry and compare them
to the industry ratios. The sample compares Southwest Airlines Company with Jet Blue Airline
Company.

Instructions:
Pick any two U.S. public companies in the same industry.
One of the two companies can be the same company someone on the team used in Week 2.
Select the 10 most important financial ratios for the two companies and calculate each for the
last 2 fiscal years using Excel.
Follow the format of the example 2016 July DMBA R Sample Week 3 Answer for 2 airlines. This
is also separately posted in this week's content module. Use the "Compare" worksheet. Note: It
is not necessary to complete all ratios
Explain how each ratio was calculated in your own words
Explain the significance of the answers found.
1. Create a single Excel file for your entire assignment.
2. The team may obtain financial information and the companies' latest annual reports on the web
directly from the Securities and Exchange Commission for the company website. MSN Money
or Yahoo Finance also have information but in some situations it may be incomplete. Current
stock price information is not available from the SEC web site.
3. The team should calculate, and comment upon, at least 10 financial ratios for the last 2 fiscal
years.

6/1/2017 W3 Group Assignment instructions for Financial Statement Analysis ­ DMBA 620 9044 Effective Financial and Operational Decision Making (2175)

https://learn.umuc.edu/d2l/le/content/271026/viewContent/9526596/View 2/2
4. All calculations should be shown, and all answers should be thoroughly explained.
5. It is useful to compare financial ratios for a company with financial ratios of its industry. Industry
financial ratios can be found on Morningstar.com, Yahoo Finance and MSN Money and
http://www.bizstats.com/corporations.asp?profType=ratios
6. Whenever the team uses balance sheet items to calculate ratios, it is more accurate to average
the beginning­of­year and end­of­year amounts to get the average for that year. Dec 31, 2014
and Dec 31, 2015 would be beginning and end of year for 2015. Note: Averaging is NOT
required. For some students taking averages leads to calculation mistakes. The example
answer does not use averaging and includes most if not all possible ratios.
7. What can the team tell from the analysis? What are the strengths and weaknesses of each
company? Which is the stronger competitor? Give reasons.
8. Show that you have read and understood the required readings, links and attached files ­ cite
and reference them where appropriate.
9. The final Excel file should be submitted by one team member into the Group Assignment folder.
The 2016 R DMBA Week 3 sample answer file contains a comprehensive analysis of the financial
statements of two large airline companies. It illustrates and explains how different companies
succeed by focusing on different key ratios like Net Income/Sales, or Sales/Total Assets (asset
turnover) or Total Assets/Common Equity (leverage). Also, it further explains how these different
strategies are revealed through DuPont Analysis (a powerful technique that many companies use
to devise, implement, and monitor their business strategies. It shows the source for every number
on every Excel worksheet: just click on any number in any Excel worksheet and you will see where
it comes from. Showing the source for every number on every Excel worksheet is very important
and helpful to readers, and you should do this on all of your Excel spreadsheets.
All of the data in the example comes from SEC interactive data. Under the company name in
interactive data is a small red link that says view excel document. All numbers in this document
are easy to use in calculations. Data copied from some other sources may not calculate correctly
in Excel.

These assignments are designed to help you to develop your analytical ability and your ability to
explain your analysis in words. There are many uses for financial statement ratio analysis, especially
in business strategy ­ for an example, see the "Strategic Control Map" developed by McKinsey &
Company, the well­known international strategy consulting firm by clicking here:
http://www.mckinsey.com/business­functions/strategy­and­corporate­finance/our­insights/enduring­ideas­the­strategic­control­map



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Comparative Comparison of Google and Microsoft
Both companies work in technology space that seems to become on the most lucrative plane of
businesses at the moment. The companies have emerged as one of the most profitable entities in
corporate finance in recent times with share price rising rapidly and having a market
capitalization on each of above half a trillion.
The comparison of performance and valuation is based on a myriad of
Profitability and Solvency
Net income. Microsoft has a higher average over the years however Google can maintain a stable
profile not as volatile as Microsoft with Return on Equity in Google kept to an average of 13%
while Microsoft tumbled from 24.6% in 2014 t15.2% in the next year.
Evaluation Profitability about equity
DuPont Analysis
This is a mode of performance measurement that encompasses three aspects of the business. The
aspects are operation efficiency using profit margin, asset utilization using asset turnover and
financial leverage measured by the equity multiplier.
In this case, we have that Google has a higher operational efficiency as can be seen from the top
profit margin at 21% contrasted to on average 18% on Microsoft.A theme of consistency in
Google is also recurring.
Asset utilization is measured using TATO ratio.Both companies have a high utility of assets and
have relative the same rate at around 50%.

The financial leverage aspect of Dupont Analysis is understood using Equity multiplier that
shows that Microsoft is higher levered than Google.at an average of 2 versus and an average of
1.2.
Determination of ROE by DuPont analysis using the formula (Staff, 2017).
 ROE = Profit Margin X Asset Turnover Ratio X Equity Multiplier.
The usage indicates a variant similar to the first direct calculation o return on capital earlier
employed and shows the ROE of Microsoft highly varied but all the same higher than that of
Google.
The companies are structured very differently however they have by calculation of the raw
earning power we can see that both of them exhibit the same amount of this power.
Alphabet Inc., which is the parent company of Google for which the analysis is being carried out
has higher profit margin both gross and net. The focus, however, is net for which Google
averaged about 21% compared to 17 % for Microsoft.
The Year and Year change is drastic for the Microsoft compared to smoother transition for
Google
The EBIT to sales ratio is used to compare the company’s profitability comparing the revenue to
the earnings. It is meant to compare efficiencies and maintaining the costs low. In this case, they
have the same average of around 25% margins. Again a factor of smooth development arises
with Google supporting as less volatile progress to Microsoft (Staff, 2017).

Liquidity entails enough cash to meet its day to day operations.The ratios discussed below detail
this and give an overview of the company ability to remain afloat.The money is generated from
services and investments.
Under a Quick ratio measure that is used to gauge some current assets that can cover the current
liabilities, we have that both companies remain very healthy.Preference to Google is made as it
can cover its current liabilities up to 4.7 times as opposed to Microsoft hat cover up to 2.4 times
its current liabilities.
A similar approach towards the measurement of liquidity is the current ratio shows they can both
cover an adequate amount of liabilities.The lack of significant amount of inventory has lead to
the similarity.The industry specific purview indicates that the the ratio that stands at around 4.7
and 2.5 coverage are good for the sector in which they operate.
The company efficacy in cash conversion through their receivables and payables turnover period
show that they have good turnaround times regarding the products and the receipt of payments
with a turnover period of Google being shorter than Microsoft.
Cash flow ratios
The rate encompasses the earnings quality analysis.A rise in this ratio means that the company
has stronger ability to fund activities through the generation of operating cash flow (Profile,
2017).
Google rate has an average of 1.5 implying that it has the adequate capacity for longer term
solvency however for MIcroft that stands at around two means they have more ability compared
to their counterparts.

Leverage and structure
Of related interest especially to shareholders is the amount that has been needed through debt
obligations. In this case, this is very high market capitalization companies with Google maintain
high lever of ownership a minuscule debt profile compare to Microsoft that has a much higher
debt/Equity ratio.
The equity multiplier measures some assets financed by shareholders a comparison of total
shareholder equity.It is a secondary component in the DuPont Analysis above.In this case, we
have Google has a lower multiple of 1.2 while Microsoft stands at and average of 2


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