Case Study 2-Financial Statement Analysis
1. Use the same company selected for your Case Study 1 (amazon) project and a second company that is a direct competitor.
2. Obtain the basic financial statements for the two companies. Company annual reports are normally posted under the “Investor Relations” tab of their web sites. Alternatively, you can obtain annual reports of publicly traded companies through the Security and Exchange Commission (SEC) website—www.sec.gov. If you use the SEC site, go to Fillings/Company Fillings and search there. Annual reports are listed under the “10K” category.
3. Chapter 13 covers financial statement analysis. Read the chapter and become familiar with the different ways financial statements are evaluated and analyzed.
4. Complete the following analysis. Submit your analysis as a PowerPoint file and be ready to present your findings at the next class.
A. Provide a brief explanation of the reasons you selected these two companies.
B. Provide a brief summary of the history of these companies, their industry and what these companies do?
C. Select 6 different financial statement ratios and perform (demonstrate) calculations for each company. Be sure to include the calculation details, e.g. the financial statement amounts you used for your ratio calculations.
D. Describe what each ratio means. Compare the different types of ratios, and determine which company is in a better financial condition.
E. Look up and document the stock prices the date of the 10-K date and as of the current day. What change ($ and %) has occurred for each company?
F. Include your sources/references in the last slide.
IM POSTING AN EXAMPLE OF WHAT YOU HAVE TO DO
Working Capital
Measures ability to pay current liabilities with current assets
Positive working capital indicates that a company can fund its current operations and invest in future activities and growth.
Current Ratio
Measures ability to pay current liabilities with current assets
The current ratio is sometimes referred to as the “working capital” ratio and helps investors understand more about a company’s ability to cover its short-term debt with its current assets.
Quick Ratio
Tells whether the entity could pay all current liabilities if they came due immediately
The higher the ratio result, the better a company's liquidity and financial health; the lower the ratio, the more likely the company will struggle with paying debts.
Working capital = 921,038 – 188,528
Working capital = 732,510
Current Ratio = 921,038 / 188,528
Current Ratio = 4.89
Quick Ratio = (443,293 + 373,959 + 15,386) / 188,528
Quick Ratio = 4.42
Working capital = 2,744,728 – 316,382
Working capital = 2,428,346
Current Ratio = 2,744,728 / 316,382
Current Ratio = 8.68
Quick Ratio = (649,916 + 1,805,278 + 90,529) / 316,382
Quick Ratio = 8.05
Debt Ratio
Expresses the relationship between total liabilities and total assets
A debt ratio greater than 1.0 (100%) tells you that a company has more debt than assets.
Meanwhile, a debt ratio less than 100% indicates that a company has more assets than debt.
Debt Ratio = 1,135,718 / 1,542,352
Debt Ratio = 0.74
Debt Ratio = (316,382 + 157,363) / 3,489,479
Debt Ratio = 0.14
Gross Margin
Amount of profit entity makes from merely selling its products, before other operating costs are subtracted
Expressed as a percentage, profit margin indicates how many cents of profit has been generated for each dollar of sale.
Gross Profit Margin = 547,343 / 818,379
Gross Profit Margin = 0.67
Gross Profit Margin = 865,643 / 1,578,173
Gross Profit Margin = 0.55
Asset Turnover
Measures amount of net sales generated per dollar invested in assets
Asset Turnover Ratio =
818,379 / (1,542,352 + 901,851)/2
Asset Turnover Ratio = 0.17
Asset Turnover Ratio =
1,578,173 / (3,489,479 + 2,254,785)/2
Asset Turnover Ratio = 0.14
Leverage Ratio
Measures impact of debt financing on profitability
Equity Multiplier Ratio = 1,542,352 / 406,634
Equity Multiplier Ratio = 3.79
Using the averages the Equity Multiplier Ratio = 3.03
Equity Multiplier Ratio = 3,489,479 / 3,015,734
Equity Multiplier Ratio = 1.16
Using the averages the Equity Multiplier Ratio = 1.12
Conclusion
Both companies are doing good within their market.
Both have a positive working capital. Shopify has a larger current and quick ratio, meaning it has more money per dollar of liability.
Shopify looks better based on debt ratio, but Etsy is not bad either, since its debt ratio is bellow 1, meaning it has more assets than debt.
Based on gross profit, Etsy seems to be more profitable, Etsy generated 0.67 cents per dollar of sale, in comparison with Shopify that generated 0.55 cents per dollar of sale.
Not much can be taken from their Asset turnover since both companies offer services and not products.
Based on Equity Multiplier (Leverage Ratio) Etsy has a higher level of debt than Shopify.