Analyst Project—Stage One
1. Pick your firm for the project.
a. Be prepared to discuss your choice with class
i. What are the firm’s primary value-producing operations?
1. Publicly traded? Which exchange?
b. Download most recent annual report (10-k)
c. Gather information on your firm and their industry and begin to organize the information.
i. 4-5 years of financial statements—balance sheets and income statements.
ii. Non-financial firm-specific and industry information.
d. Assign tasks within the team to gather information and then meet to share and discuss the information and what it means.
2. After you gather financial data on your firm for at least 4-5 years—we’ll want to have this much data to notice trends in key relationships—you will want to organize the financial information in Excel to simplify your ongoing analyses and because the Excel workbook will become part of your final project.
i. Locate the auditor’s opinion letter and management’s responsibility letter and read them. Is it a clean opinion? Any qualifying language?
ii. Locate and read through the MD&A. This is an excellent source of (biased) information on what management believes about the firm’s future.
iii. Remember our focus on operations. From the balance sheet, identify operating assets and non-operating assets. Highlight the operating assets and compute NOA. (You’ll likely want a separate Excel tab that carries over only operating items)
iv. From the income statement, Compute NOPAT (net operating profit after tax).
v. Compute ROA, ROE, RNOA, NOPM. Look for and identify trends or stability in these key ratios.
vi. For our valuation work we’ll eventually want to compute FCFF (Free Cash flows to the Firm) (FCFF = NOPAT-Increase in NOA)
b. Disaggregate ROE into margin, turnover and leverage:
c. Do you notice any trends in ROE or the disaggregated components?
1. Compute either ART or ACP for your firm. Are there any trends that warrant further investigation?
2. Compute inventory turnover or average days inventory outstanding. Again, notice any trends that may require further investigation.
3. Using the D&B Industry Norms and Key Business Ratios compare industry averages for the available ratios you’ve computed so far. Note any material departures for your firm from industry averages that will warrant investigation.