Ratio Analysis

his is your second interview with a prestigious brokerage firm for a job as an equity analyst. You survived the morning interviews with the department manager and the vice president of equity. Everything has gone so well that they want to test your ability as an analyst. You are seated in a room with a computer and a list with the names of two companies – Ford (stock symbol F) and Microsoft (stock symbol MSFT) and are asked to do the following analysis including computing stock ratios for F and MSFT, comparing and contrasting those ratios, and analyzing the performance of the stocks versus the industry averages.

Complete the following tasks and write a four- to five-page report on your findings, including the analysis in Questions 2 and 3 below.

1. Compute ratios by following the below directions:

• Navigate to Morningstar (http://www.morningstar.com/). In the Quote box at the top of the page, enter each stock symbol, choose your companies, and click on the Financials tab. You will see underneath the Financials tab the three financial statements (Income Statement, Balance Sheet, and Cash Flow). An Export button is to the far right. Download the income statement and balance sheet financial statements for each company.


• Next, you will need historical data for each stock. Navigate to Yahoo! Finance (https://finance.yahoo.com/), enter each stock symbol, click on Historical Data, and select ending date of the most recent full reported year (for example, if the income statement ending is December 2016, select December 30 to 31, 2016). Note the company’s stock closing price for the last day of the financial statement reporting period you will use for this assignment. To determine each organization’s market capitalization at the closing date of the most recent annual statements you downloaded from Morningstar, multiply the number of shares outstanding by the stock price you obtained from Yahoo! Finance. Use the number of shares outstanding by using Basic under Weighted Average Shares Outstanding on the income statement you downloaded from Morningstar (remember, the share value will be in millions of shares, so make the adjustment by adding 0s).


• Compute the following ratios for F and MSFT (refer back to Week 1) for the most recent year of financial statements downloaded from Morningstar:
  
  
  
  • Price-earnings ratio (for EPS, use diluted EPS total)
  
  
  • Market-to-book ratio (aka price-to-book ratio)
  
  
  • Operating margin
  
  
  • Net profit margin
  
  
  • Return on equity
  
  
  • Current ratio
  
  
  • Quick ratio
  
  
  • Debt-to-equity (for debt, use long-term debt)
  
  
  
  


• Obtain industry averages for each company by going to Reuters (http://www.reuters.com/finance/markets). Click the magnifying glass search icon, enter each company’s name, click on Companies, select each company, and then the Financials tab. Scroll down under Valuation Ratios and each ratio you calculated to the industry (ignore the current company ratios as these are not the same as you calculated).

2. Analyze the performance of each firm versus the industry, and comment on what you find in terms of strengths and weaknesses.

3. Compare and contrast the ratios for F and MSFT.

1. What might explain the differences between them?


2. Would you recommend investors buy, hold, or sell F and MSFT, based on your analysis?

Your assignment must follow these formatting requirements:

• This course requires the use of new Strayer Writing Standards (SWS). The format is different than other Strayer University courses. Please take a moment to review the SWS documentation for details.


• Typed, double spaced, Times New Roman font (size 12), one-inch margins on all sides, SWS format.


• Use headers for each of the subjects being covered, followed by your response.


• In addition to the four to five pages required, a title page is to be included. The title page is to contain the title of the assignment, your name, the instructor’s name, the course title, and the date.

The specific course learning outcomes associated with this assignment are:

• Formulate approaches to current asset management, capital budgeting, financial structure, dividend policy, long-term financing, and mergers.


• Analyze approaches to current asset management, capital budgeting, financial structure, dividend policy, long-term financing, and mergers.


• Write clearly and concisely about financial management using proper writing mechanics.

You can view a rubric for this assignment here.