Financial Strength Ratios

 

 

SCENARIO:
This 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 (F) and Microsoft (MSFT). You have 90 minutes to complete the following
tasks:
1. Download the annual income statements, balance sheets, and cash flow statements for the last four fiscal
years from MarketWatch (www.morningstar.com). Enter each company’s stock symbol and then go to
“financials.” Export the statements to Excel by clicking the export button.
2. Find historical stock prices for each firm from Yahoo! Finance (finance.yahoo.com). Enter your stock symbol,
click “Historical Prices” in the left column, and enter the proper date range to cover the last day of the month
corresponding to the date of each financial statement. Use the closing stock prices (not the adjusted close). To
calculate the firm’s market capitalization at each date, multiply the number of shares outstanding (see “Basic”
on the income statement under “Weighted Average Shares Outstanding”) by the firm’s historic stock price.
3. For each of the four years of statements, compute the following ratios for each firm:
Valuation Ratios
Price-Earnings Ratio (for EPS use Diluted EPS Total)
Market-to-Book Ratio
Enterprise Value-to-EBITDA
(For debt, include long-term and short-term debt; for cash, include marketable securities.)
Profitability Ratios
Operating Margin
Net Profit Margin
Return on Equity
Financial Strength Ratios
Current Ratio
Book Debt-Equity Ratio
Market Debt-Equity Ratio
Interest Coverage Ratio (EBIT ÷ Interest Expense)
4. Obtain industry averages for each firm from Reuters.com (www.reuters.com/finance/stocks). Enter the stock
symbol in the field under “Search Stocks,” select the company from the list, and then click the “Financials”
button.
Compare each firm’s ratios to the available industry ratios for the most recent year. (Ignore the “Company”
column as your calculations will be different.)
5. Analyze the performance of each firm versus the industry and comment on any trends in each individual
firm’s performance. Identify any strengths or weaknesses you find in each firm.
6. Examine the Market-to-Book ratios you calculated for each firm. Which, if any, of the two firms can be
considered “growth firms” and which, if any  , can be considered “value firms”?
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7. Compare the valuation ratios across the two firms. How do you interpret the difference between them?
8. Consider the enterprise value of each firm for each of the four years. How have the values of each firm
changed over the time period?

 

 

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