CALIFORNIA STATE POLYTECHNIC UNIVERSITY, POMONA Purpose of the Project: This group project is designed to apply the key analysis discussed in the course to a practical case by applying them to specific companies. Each team will choose one company for analysis, and another company in the same industry for comparison.Overall Description: The project will be most effective if you take the position that you are considering whether or not to invest in the common stock of the company or its competitor. You will be addressing the most important financial reporting issues for each company, including: ? Strategic direction of the company with respect to products and markets, and critical factors affecting the success of the company and its competitor. ? Identification of ratios most useful to assess the success of the company and industry. ? Assessment of liquidity, solvency, profitability and cash flows for the past year. Comparison to prior years and industry statistics is crucial. ? Identification of any significant events or transactions affecting the usefulness of the financial statements in coming to a conclusion about the company, such as write-offs, restructurings, one-time gains, contingencies, unrecorded assets or liabilities or other quality of earnings issues. ? Identification of key accounting policies that may affect your ability to analyze the company ? Assessment of the firm?s attractiveness as an investment at the current market price ? Summary of the views of professional analysts. The final product will likely be an 10-15 pages including tables, charts and graphs. Think long and hard about whether the information that is included in your paper is necessary for an understanding of the company; and whether all necessary information is included.Grading and Group Dynamics: Grades for the group project are assigned to the group as a whole, except that an individual grade is based on peer and my evaluations of individual effort and contribution. Group members will be asked to assess the quality of other member?s effort and contribution. This is NOT a cut-and-paste project?all parts of the assignment are the responsibility of the entire group. Occasionally groups have a great deal of difficulty functioning effectively. I expect to be notified if significant problems exist.In this assignment, you will have to do the following specific tasks:1. Obtain a copy of a large publicly-held company?s annual report to shareholders. You can usually obtain a copy from the company?s web site. Alternatively, you may want to try www.sec.gov/edgar or www.wsj.com.2. Also, identify one of the company?s major competitors. Obtain a copy of the competitor?s annual report. The purpose of this is to give you something with which to compare your company?s performance. Look for results in the analysis that differ significantly from your company. It is usually most interesting to use a competitor that has similar products but a different business strategy (e.g. a name-brand pharmaceutical company vs. a generic drug-maker; or a high end jeweler vs. a mass-market jeweler).3. Describe your company?s major products. Contrast to competitor.4. Describe the business environment in the industry, and the business strategy chosen by your company and the competitor. Consider the degree of competition from existing competitors, potential entrants and substitute products. Assess the industry?s power over customers (for example, can they raise prices?) and over suppliers (are they dependent on a single supplier, or could they easily switch suppliers?). What are the major trends in the industry? How important is technology? Regulations? With regard to business strategy, you want to identify key success factors and business risks, and to assess the company?s ability to create a sustainable competitive advantage. (What must the company do right to succeed? Has it chosen a low cost leadership or a product differentiation strategy?).5. Given the company?s keys to success, what would you consider to be the most important ratios or other data to use to evaluate how successful your company has been in executing its strategy? These can be financial ratios such as gross profit margin or inventory turnover, or non-financial ratios such as load factor in the airline industry (how full are the planes?); sales per square foot in retail; quality control assessments and the like.For this assignment, you will also be evaluating the company?s performance, liquidity, and solvency. Please provide the ratios requested below, in a table format, then, discuss your findings.Performance Name of ratio Your Company Competitor 2013 2012 2013 2012 Return on Equity Return on Assets Profit Margin Gross Profit Margin Asset Turnover Accounts Receivable Turnover Inventory Turnover Property, Plant & Equipment Turnover1. How successful is your company in using its business strategy to generate profits? Compare to competitor. 2. Explain the major reasons that profitability changed from the prior year. 3. Do you think profits will continue at the same level or rise/decline next year? Why?Liquidity Name of ratio Your Company Competitor 2013 2012 2013 2012 Current Ratio Quick Ratio Operating Cash Flow to Current Liabilities1. Does liquidity seem appropriate for the company, or do you foresee any liquidity problems or inefficiencies? Compare to competitor. 2. Does the company have any options (a line of credit? assets it could readily sell?) if faced with a cash crunch?Solvency Name of ratio Your Company Competitor 2013 2012 2013 2012 Debt-to-Asset Ratio Debt to Equity Ratio Times Interest Earned1. Does the financing mix of the company appear appropriate and manageable given their industry and business strategy?Accounting Policies and Footnotes1. Contrast the key accounting policies to those of the competitor. (For example, is one using LIFO and the other FIFO? Does one use accelerated depreciation and the other straight-line?) Which accounting policies have the most significant impact on the financial statements? What choices in policies has your company made that limit the ability to directly compare the financial position or profitability of the two companies? Would you characterize the accounting policies of your company as aggressive or conservative?2. What, if any, intangible assets exist on the company?s balance sheet? How did these arise? Will they contribute to future cash flows?3. Are there any unrecorded economic assets or liabilities related to contingencies, pensions, leases, deferred taxes, research and development or other causes? Determine if this means that you should modify any ratios to find the true liquidity, solvency or profitability analysis. Evaluate the potential impact on future profitability/cash flows.Quality of Earnings 1. Identify from a review of the income statement and footnotes whether there are any unusual items in earnings (e.g., discontinued operations, restructurings, contingent liability recognition, one-time gains). Determine if these unusual items mean that you should modify any ratios to determine the true liquidity, solvency or profitability analysis.2. Given the above and the company?s accounting policies, evaluate the company?s quality of earnings. Your final product should be a standalone analysis of the company?s business strategy and financial performance. It should include the information that you believe is most important. It should include the key information for a financially literate person to decide whether to invest in this company. At the end, provide a Buy, Sell, or Hold recommendation. Why do you think the results were different with the experimental research and the nonexperimental research?:
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