Finance Ratio Analysis

– Choose a sector and three companies to analyze. (Saudi company)

– ?Use provided methods to analyze performance against industry and previous 5 years.

– ?Focus on Liquidity, Asset efficiency, Profitability, Solvency, and Market Value.

– ?Perform DuPont analysis for Return on Equity breakdown.

– ?Use pre-prepared ratios available online. (https://www.readyratios.com/sec/industry/?)

– ?Submit as Word document on Turnitin, avoid PDF. and Postor on alfaisal format.

The industry selected is Petrochemicals

And these are the companies

Saudi Basic Industries Corporation (SABIC)

Advanced Petrochemical Company (ADVANCED)

Petrochemical Industries Company (PIC)

Dear Students,
For up to three Bonus marks, I am setting you a task to analyze 3 companies from a sector of your
choosing, using the methods we have looked at in Topics 2 and 3. In effect, you will have to perform an
analysis of these companies, providing an interpretation of their performance against the industry and 5
years of previous performance. You must look at matters of Liquidity, Asset efficiency, Profitability,
Solvency and Market Value. I also want you to perform a DuPont analysis breaking down the Return on
Equity.
Grades are awarded for quality of interpretation and not for calculations. You are free to use preprepared ratios available on the websites highlighted in class. I award a higher score for the project
based on how interesting the project is, the quality of your interpretation and the presentation.
For an additional 2 marks, you can submit the work as a poster in our upcoming poster competition,
hosted here at Alfaisal University. To do so you will need to use Saudi firms and it must say something
about the market/industry in which the firms are operating. You must also abide by all the rules and
conditions set down in the competition. Here is the link for the competition
https://research.alfaisal.edu/poster-comp . However, please be aware that the closing date for the
competition is 22nd of February.
If you are not entering the poster competition you may choose firms from any country.
You can work in groups of up to three people. Please do not ask for groups with higher numbers than
this. You are welcome to do the project on your own if you like, although no additional grades are
available for doing so.
The project will be submitted using Turnitin software on the Moodle site. It should be no longer than
1500 words long and no shorter than 1300 words. Grades will be deducted for submissions outside of
this range. The submission must be in a word document and not a PDF. Submissions that are submitted
as a PDF will not receive a grade.
If you use AI to generate the content you will receive a grade of zero. Avoid using Grammarly, some
students claim that this can show up as AI generated content. I will not make the distinction, if I
receive any indication the content is generated by AI, I will award it zero, without chance of appeal.
You are also not permitted to plagiarize the content, submissions found to be plagiarized will also
receive an automatic grade of zero without chance of appeal. Please adhere to normal academic
conduct standards when submitting your work.
Note that the marks are calculated as Bonus marks and are 3 marks and 5 marks respectively from the
overall 100 marks available on the course.
The closing date for submission is midnight on March 17th 2024, there is no extension for this, please
do not request one. In the interests of ensuring fairness, I won’t be able to review anyone’s work ahead
of submission.
Best regards
Brendan
Topic III
Financial Statements Analysis
and Financial Models
Company
Tesla, Inc.
Total Assets
$62,131 million
General Motors
$224,718 million
Company
Mercedes-Benz Group €259,831 million
AG
Toyota Motor
¥31,379,507 million
Corporation
Comparisons
Date
31 Dec 2021
31 Dec 2021
31 Dec 2021
30 Mar 2022
Comparing financial statements of two companies could be
difficult due to differences in size and currency denomination.
CommonSize Balance
Sheets
Comparing
Income
Statements/
Profitability
Measures
Measure
Description
Net Income
The bottom line, defined as total revenue
minus total expenses. It is a source of
dividends and retained earnings.
Earnings Per Share (EPS)
Net income divided by the number of shares
outstanding.
Earnings Before Interest and Tax (EBIT)
Operating income before unusual items,
discontinued operations, or extraordinary
items.
Earnings Before Interest, Taxes,
Depreciation, and Amortization (EBITDA )
EBITDA = EBIT + depreciation and
amortization
Two non-cash items added, hence a better
measure of before-tax operating
performance.
A useful way of standardizing the income statement is to express each items
as a percentage of total sales.
Common-Size Income Statement
Ratio Analysis
• Accounting ratios allow comparisons across companies
• Textbooks give different definitions
• Used for sector, competitor’s, and historical
comparisons
• Some of the ratios can be found on finance.yahoo.com
in the ‘Statistics’ tab
• Source of industry averages for these ratios:
https://www.readyratios.com/sec/industry/
Industry Norms and Key Business Ratios (Print
Resource)
RMA Annual Statement Studies (Print Resource)
Liquidity ratios
Liquidity ratios assess whether the organization has
enough cash to run its daily business operations.
Walmart
ManpowerGroup
Current Ratio
0.80
1.44
Quick Ratio
0.23
1.44
Example of Prufrock
Long-Term Solvency Measures
Long-term solvency ratios measure firm’s ability to meet its obligations in the long-run.
Long-Term Solvency Measures II
Asset Management or Turnover Measures
These measures gauge how efficiently firm’s assets are used.
Auto Inventory / Sales Ratio in the US
Profitability Measures
DuPont
Analysis
DuPont
Analysis of
Amazon and
Alibaba
Market value measures
Average PE ratio in the US
Source: Web site of Prof. Robert Shiller
Picking stocks based on their Price-to-Book Ratio
Market Value Measures II
Problems with Financial
Statement Analysis
• Financial statement do not say
much about risk and value
• Companies may not fall neatly
into a given industry grouping
• Companies may not have
direct competitors
(monopolies)
• Accounting standards not
homogenous across the world
• Different accounting
procedures adopted by
companies
• Different fiscal year ends
Pro Forma Statements – A Simple Financial Planning Model
We are projecting future financial statements by assuming that sales (and all other variables) will grow by 20%.
Certain items can be modified but reconciliation is needed.
Computerfiled Corporation
Current Financial Statements
Income Statement
Value
Sales
$1,000
Costs
$800
Net income
$200
Assets
Total
Balance Sheet
Value
$500 Debt
Equity
$500 Total
Computerfiled Corporation
Pro Forma Financial Statements
Value
$250
$250
$500
Income Statement
Value
Sales
$1,200
Costs
$960
Net income
$240
But what if reinvest all of the profits?
Assets
Total
Balance Sheet
Value
Change
$600
$100 Debt
Equity
$600
$100 Total
Value
Change
$300
$50
$300
$50
$600
$100
The Percentage
Sales Approach
– Income
Statement
The Percentage
of Sales
Approach –
Balance Sheet
(Step I)
The Percentage
of Sales
Approach –
Balance Sheet
(Step II)
Useful formula?
External
Financing
and Growth
Current debt to equity ratio = 1
Now assume a sales increase of 20%.
External
Financing
and Growth
If the company does not want to issue new equity and cover the financing need
with debt, then debt/equity = $297.2/$302.8 = 0.98
Internal and Sustainable Growth Rates
Problems with Financial
Planning Models
• Lack of focus on firm value and its components
(cash flows, risk, and timing)
• Preoccupation with growth and debt-equity ratio
may not lead to meaningful strategies
• These models may point out problems but not the
solutions
• Financial planning is an iterative process