This section requires each group to assess the chosen firm’s Strategy. Think of this section as an exercise in identifying, analyzing, and synthesizing data and information to support your chosen company’s (strategic) decisions to maximize customer value and enterprise value. Based on information in the annual reports or that published on the firm’s website, summarize what the firm views as the reasons for its successes (either past or expected in the future). Search for both quantitative and qualitative success factors provided in the report.
Evaluate the financial performance of the chosen firm X. What insights can financial analysis offer into the sources of superior (or inferior) firm performance?
A good financial analysis goes beyond the numbers and makes conjectures about emerging trends and likely strategic implications of the numbers, often by combining insights from multiple elements of the financial statements.
Required Content for Grading
• What does your financial analysis reveal about the firm? How well or badly is the company performing?
Use some financial metrics to support your answer. It is very important that you use several measures of firm performance to analyze your chosen company’s performance. Additionally, you should compare these metrics over an extended time period. Further, you should compare these metrics with those of the best performers in your chosen industry.
Develop key financial ratios and analyze them in terms of trends, industry comparisons, etc. Financial data presented without some solid comparisons tends to be relatively meaningless.
Please click on the link to access a list of financial ratios and their definitions. We are interested in Profitability and Efficiency ratios. Profitability ratios measure the ability of a firm to generate profit, e.g.: ROA, ROE, ROCE, Gross Profit Margin, etc. Efficiency ratios capture the effectiveness of firm’s usage of assets and liability, e.g.: Asset
Turnover, Inventory Turnover, etc.
OTHER TYPES OF RATIOS (Not required for our analysis)
1. Capitalization ratios measure the debt component of a firm’s total capital structure, e.g.: Capitalization Ratio, Total Debt-to-Invested Capital Ratio, etc.
2. Financial Soundness/Solvency ratios capture the firm’s ability to meet long-term obligations, e.g.: Total Debt to Equity Ratio, Interest Coverage Ratio, etc.
3. Liquidity ratios measure a firm’s ability to meet its short-term obligations, e.g.: Current Ratio, Quick Ratio;
4. Valuation: estimates the attractiveness of a firm’s stock (overpriced or underpriced), e.g.: P/E ratio, Shiller’s CAPE ratio, etc.
5. Other Miscellaneous ratios, e.g.: R&D-to-Sales, Labor Expenses-to-Sales.
• Based on your analysis, does it appear that the firm’s financial performance is headed in the right direction or is there a gap between current performance and what the firm’s performance should be?
While the above question requires you to simply explain the temporal and cross-sectional variation in measures of firm performance, this question requires you to link these variations in measures of firm performance to that in the operational metrics. What are the underlying reasons for the variation in firm performance?
Ideally, explain the changes within the company over 3-5 years, if possible. Furthermore, it is usually best to compare with the industry norms and averages or combine several of the closest competitors into a single basket.
Please refer to the following framework in Chapter 2.
Source: Grant (2016) Contemporary Strategy Analysis, Figure 2.1
• How do the public financial markets perceive the performance and future potential of this firm?
You can discuss whether the stock is over- or under-valued. Explain possible reasons for either. For instance, earnings per share (EPS) are an important measure of corporate performance that helps forecast growth. It is therefore logical to expect that these numbers influence the companies’ stock prices. However, there are multiple definitions of earnings that include, or omit, different kinds of information. Hence, the different earnings numbers of the same publicly traded company (provided by different data sources) give different information about what the company is doing.
A particular earnings number may be trying to highlight or play down some activity. It is therefore very important for investors to understand the different kinds of earnings numbers. S/he should know what s/he is looking for in an earnings number. For instance, firms report both GAAP and non-GAAP earnings. While companies are required to report GAAP earnings, they also report non-GAAP earnings to provide information about the performance of the core business operations by subtracting things like depreciation, marketing and administrative costs. Typically, non-GAAP earnings exclude expenses GAAP requires, such as restructuring charges and asset write-downs. Companies would like investors to base their decision (to invest) on the information provided by non-GAAP earnings. In such a situation, an investor should also compare the GAAP and non-GAAP earnings to the “street earnings”, which are produced by Wall Street analysts and data providers. An investor should understand that one type of numbers are not necessarily better than the other. It is important that s/he understand the information provided by the numbers.
• Does the firm seem most focused on the economic, accounting, or shareholder perspective of its performance?
Give quotes or information from these sources to support your view. Alternately, use actual cited metrics or measurements and identify the category to which they belong.
Check out the following video posted by McKinsey & Co. for a brief insight into economic profits.
• Many firms are now including annual corporate social responsibility (CSR) reports on their websites. See whether your firm does so. If not, are there other indications of a triple-bottom-line approach, including social and ecological elements in the firm’s strategies?