Culminating Activity

Grade 12 Accounting Culminating Activity

Financial Analysis of a Company

 

Description

 

Your group has been hired by an investor interested in investing in a company traded on the TSX in your given industry.  In pairs, you will be responsible for conducting a SWOT analysis of your company and calculating financial ratios.  As a full team, you will create a ratio analysis comparing the companies as well as an investment recommendation.

 


Communication and Media Companies

Rogers

BCE

 

Telecommunications

Cogeco Inc

Shaw Communications

Telus

 

Railways

CP Railway

CN Rail

 

Supermarkets

Loblaw

Metro Inc

Empire Company

 

Restaurants

Boston Pizza Income Fund

Keg Royalties Income Fund

Pizza Pizza Royalty Corp

 

Oil and Gas

Suncor Energy

Imperial Oil

 

Women’s Apparel

Reitmans

Le Chateau

 

Retailers

Hudson’s Bay

Dollarama

Indigo Books and Music

 

Airlines

West Jet

Air Canada

 

 

Deliverables

  1. SWOT analysis and accounting practices by company team —  Due date
  2. Ratio calculations for 3 years by company team — Due date
  3. Report containing Investment recommendation with ratio analysis by industry team – due date

 

Part One: SWOT Analysis and Accounting Practices

 

SWOT Analysis

You will conduct a SWOT (strengths, weaknesses, opportunities and threats) analysis of your company.

 

A through reading of the first part of the annual report will help you find the strengths and weaknesses of the company.  The report will focus on the strengths but you should be able to uncover some weaknesses as well.  Further research in the form of investment analysis can also help.  A good resource is Google Finance.

 

Strengths

  • What advantages does your organization have?
  • What do you do better than anyone else?
  • What unique or lowest-cost resources can you draw upon that others can’t?
  • What do people in your market see as your strengths?
  • What factors mean that you “get the sale”?
  • What is your organization’s Unique Selling Proposition  (USP)?

Consider your strengths from both an internal perspective, and from the point of view of your customers and people in your market.

Weaknesses

  • What could you improve?
  • What should you avoid?
  • What are people in your market likely to see as weaknesses?
  • What factors lose you sales?

Again, consider this from an internal and external basis: Do other people seem to perceive weaknesses that you don’t see? Are your competitors doing any better than you?

 

Opportunities

  • What good opportunities can you spot?
  • What interesting trends are you aware of?

Useful opportunities can come from such things as:

  • Changes in technology and markets on both a broad and narrow scale.
  • Changes in government policy related to your field.
  • Changes in social patterns, population profiles, lifestyle changes, and so on.
  • Local events.

 

You should be able to find opportunities mentioned in the annual report as well.  Looking at general business trends and investors analysis can also be helpful.

 

Threats

  • What obstacles do you face?
  • What are your competitors doing?
  • Are quality standards or specifications for your job, products or services changing?
  • Is changing technology threatening your position?
  • Do you have bad debt or cash-flow problems?
  • Could any of your weaknesses seriously threaten your business?

 

The risk discussion in the MDA section of the annual report will be very helpful for completing this section of the SWOT.

 

Format

Your SWOT analysis can be completed in a matrix like the one above or in paragraph form using the 4 headings.

You should have a minimum of 4 points in each box and each point should include an explanation and/or evidence to support your statement.

 

 

 

Accounting Practices
Identify the auditors of the financial statements, the fiscal year of the company and the following accounting practices:

  • Depreciation and amortization methods
  • Bad Debt Expense
  • Inventory valuation method (if applicable)

As long as you properly cite the source, you may copy the key accounting practices directly from the financial statements

 

Works Cited List

Include a works cited list with your SWOT analysis in APA format.

 

A Note on Sourcing

 

If at any point you are copying a phrase directly from the annual report, you must footnote or endnote it or use an in text citation.  For instance, for the method of accounting for goodwill, you may find it difficult to put the statement in your own words.  If you copy it directly, you must source it properly by putting a footnote[1] and including the annual statement information at the bottom of the page or by putting an in text citation. (Company name, year).

 

This also applies to any ratio descriptions used from the web.

 

Part Two: Ratio Calculations

 

For three years, calculate the following ratios for your company.

 

  • Liquidity
    • Current Ratio
    • Quick Ratio

 

  • Activity
    • Accounts Receivable Turnover
    • Inventory Turnover
    • Operating Cycle

 

  • Solvency
    • Times Interest Earned
    • Debt to Equity

 

  • Profitability
    • Gross Profit Margin
    • Return on Net Sales
    • Return on Equity
    • Return on Assets

 

Submit a printed copy showing the final value for each ratio and a printout of the financial statements used to calculate ratios.

Part Three: Ratio Analysis and Investment Recommendation

 

This is a formal business report that uses headings to organize the information.  The text should be single-spaced.   Include a title page and a works cited list.

 

Introduction

Give a brief overview of each of the companies (primary products/services, size, location)

 

SWOT Analysis

Resubmit your SWOT analysis with in your final report.

 

Ratio Analysis

 

Provide a commentary on the following ratios:

  • Quick Ratio
  • Operating Cycle
  • Debt to Equity Ratio
  • Times Interest Earned
  • Return on Assets
  • Return on Equity
  • Return on Net Sales

 

Provide one graph for each ratio that shows the performance of each company.  Explain what the ratio tells you about the performance of the company.  Your commentary should describe the overall favourability of the ratio as well as a comment on the trend of the ratio (increasing, decreasing, good or bad for the company).  You should compare the performances of the companies and identify the superior performing company for each ratio.

 

Recommendation

As a team, determine the company or companies you would recommend to your investor.  You can choose, one, none, all or some depending on the company’s performance.  You do not lose marks if your company is a poor investment and you advise your client not to invest.

Your recommendation should cover the four areas of company performance (Liquidity, Activity, Solvency and Profitability).  You can discuss current share price and market performance if you wish but it is not required as this is accounting not finance.

You should also include any relevant information from your SWOT analyses.

 

You must hand in a bound hard copy with a title page and works cited list.

 

Due Dates

 

SWOT Analysis:

Ratio Calculations:

Final Investment Report:

 

Ratio Guide

  Formula Guide
Liquidity Ratios
Working Capital ($) Current Assets – Current Liabilities Positive, Healthy
Current Ratio Current Assets

Current Liabilities

2:1
Quick Ratio Current Assets above Inventory
Current Liabilities
1:1
Inventory to Net Working Capital Inventory

Current Assets – Current Liabilities

Lower better
Activity Ratios
Inventory Turnover Cost of Good Sold
Average Inventory
Higher Better
Inventory Turnover Period (days) 365

Inventory Turnover

Lower better
Accounts Receivable Turnover Net Sales on Credit (or closest approximate)
Average A/R
 Higher Better
Accounts Receivable Turnover Period (days) 365

A/R Turnover

Lower Better
Operating Cycle (days) Inv. Turnover Period + A/R Turnover Period Lower Better
Borrowing Capacity/Solvency Ratios:
Times Interest Earned Operating Income

Interest Expense

Higher Better
Equity Ratio (%)
x 100%

Total Equity

Total Assets

> 50%
Debt Ratio (%)
x 100%

Total Liabilities

Total Assets

< 50%
Debt to Equity Total Liabilities

Total Equity

< 1
Profitability Ratios:
Gross Profit Margin (%) (Sales – COGS)

Sales

Higher Better
Return on Net Sales (%) Net Income

Net Sales

Higher Better
Return on Equity (%) Net Income

Average Equity

Higher Better
Return on Assets (%) Operating Income

Average Assets

Higher Better
Earnings per Share (normally you can find this on your financial statements – you won’t have to calculate it.) (Profits After Taxes – Preferred Shares Dividends)/Number of common shares outstanding Higher Better

 

[1] WestJet Airlines. (2008). Annual report to shareholders. Calgary, AB: Author. Retrieved from

http://www.sedar.com