10 – 15 Page Report (Title Page, Abstract, References DO NOT COUNT towards the total number of written pages)
Instructions
Pretend you are a consultant turning in a professional presentation worth $250,000 to your client who is looking to improve their operations and financial results. I want you to select a company and do a thorough financial analysis for this company. Please make sure that this company is publicly-traded on the stock market as it will be easier to find the kind of information you are looking for on them. Please make sure to DOWNLOAD THEIR ANNUAL REPORT as there will be quite a bit of information found on the company you can use in your report (please make sure you cite your resources).
I am looking for your BEST WORK – please do not disappoint with this assignment! This is a great opportunity for you to learn!
Major Areas to Address in Your Report
Introduction
General Introduction to the Company – tell us what they do, what they sell, when they started, anything that might help us to understand more about the business etc…
Checklist for Analyzing the Current Situation
Phase 1: The environment.
The first phase in analyzing a company is to consider the environment in which the firm is operating. The economic environment can have a decided effect on an industry, firm, and management program. For example, a depressed economy with high unemployment may not be an ideal situation for implementing a large price increase. The social and cultural environment also can have considerable effect on both multinational and domestic firms. For example, the advent of men’s hairstyling could be considered an appropriate reaction to today’s longer hairstyles, whereas a price reduction to stimulate demand for haircuts could well be inappropriate.
Are there any trends in the environment that could have an effect on the industry, firm, or management program?
What is the state of the economy? Inflation? Stagflation? Depression?
What is the cultural, social, and political atmosphere?
Are there trends or changes in the environment that could be advantageous or disadvantageous to the industry, firm, or management program? Can the management program be restructured to take advantage of these trends or changes?
Phase 2: The industry.
The next phase involves analysis of the industry in which the firm operates (please identify whether the company operates in perfect competition, oligopoly, monopoly, or monopolistic competition). This phase can be critical, particularly in terms of how the firm’s product is defined. A too narrow definition of the industry and competitive environment can be disastrous not only for the firm but also for the individual analyzing the company. After initial definition and classification, attention should be paid to such factors as:
Technology.
Level.
Rate of change.
Technological threats to the industry.
Political-legal-social influences.
Trends in government controls.
Specific regulations.
Social responsibility pressure.
Consumer perceptions of industry.
Perform SWOT Analysis (Strengths, Weaknesses, Opportunities, and Threats)
Analyze Porter’s Five Forces (Bargaining Power of Customers, Barriers to Entry, Rivalry Among Competitors, Bargaining Power of Suppliers, and Threats of Substitutes)
Industrial guidelines and trends.
Pricing policies.
Promotion.
Product lines.
Channels of distribution.
Geographic concentration.
Increases or declines in firms or profitability.
Financial Indicators
Financial ratios.
Working capital required.
Capital structure.
Sources and uses of funds.
Sales.
Profitability.
Class Possible Implications
1. A few giants (oligopolistic).
Examples: Aluminum producers, cigarette manufacturers
Price cutting is fruitless.
Antitrust action is a hazard.
Concerned action leads to a monopolistic situation facing the customers
Very high capital costs to enter the industry
2. A few giants and a relatively small number of “independents.”
Examples: Auto industry. Antitrust action. Oil industry. Tire industry. Meat processors
Price cutting by smaller companies may bring strong retaliation by giants.
Follow-the-leader pricing
Monopolistic prices.
Squeeze on the independents.
High capital costs to enter the industry.
3. Many small independent firms.
Examples: Food brokers. Sales reps. Auto supply parts. Kitchen cabinet manufacturers. Real estate firms. Tanneries.
Cost of entry is low.
Special services.
Usual local market.
Threat of regional or national linking into a major competitor
Sophisticated business practices often lacking
4. Professional service firms.
Examples: Management consultants. Marketing research firms. Advertising agencies.
Confusion of standards.
Easy entry (and exit).
Secretive pricing, often based on what the traffic will bear
5. Government regulated to a great degree.
Examples: Banking. Stock brokerages. Rail industry. Communications industry.
Entry is usually difficult.
Government provides a semimonopoply that may lead to high profits or inability to survive in a changing world.
Phase 3: The firm.
What are the objectives of the firm? Are they clearly stated? Attainable?
What are the strengths of the firm? Managerial expertise? Financial? Copyrights or patents?
What are the constraints and weaknesses of the firm?
Are there any real or potential sources of dysfunctional conflict in the structure of the firm?
How are the functional departments (e.g. marketing, financial services, controlling, HR…) structured in the firm?
What is the corporate culture of the firm? What kind of management style is preferred?
How do employees communicate?
Phase 4: The management program.
What are the objectives of the management program? Are they clearly stated? Are they consistent with the objectives of the firm? Is the entire management toolbox structured to meet these objectives?
What management concepts are at issue in the program? Is the management program well planned and laid out? Is the program consistent with sound management principles? If the program takes exception to management principles, is there a good reason for it?
To what target market is the program directed? Is it well defined? Is the market large enough to be profitably served? Does the market have long-run potential?
What competitive advantage does the management program offer? If none, what can be done to gain a competitive advantage in the market place?
What products are being sold? What is the width, depth, and consistency of the firm’s product lines? Does the firm need new products to fill out its product line? Should any product be deleted? What is the profitability of the various products?
What promotion mix is being used? Is promotion consistent with the products and product images? What could be done to improve the promotion mix?
What channels of distribution are being used? Do they deliver the product at the right time and right place to meet consumer needs? Are the channels typical of those used in the industry? Could channels be made more efficient?
What pricing strategies are being used? How do prices compare with similar products of other firms? How are prices determined?
Are business research and information systematically integrated into the management program? Is the overall management program internally consistent?
Are (senior/middle) managers capable to translate strategy into action? Are managers excellent in action or just in talking?
The relevant information from this preliminary analysis is now formalized and recorded. At this point the analyst must be mindful of the difference between facts and opinions. Facts are objective statements, such as financial data, whereas opinions are subjective interpretations of facts or situations. The analyst must make certain not to place too much emphasis on opinions and carefully consider any variables that may bias such opinions.
Regardless of how much information is contained in the company or how much additional information is collected, the analyst usually finds that it is impossible to specific a complete framework for the current situation. It is at this point that assumptions must be made. Clearly, since each analyst may make different assumptions, it is critical that assumptions be explicitly stated.
Analyze and Record Problems and Their Core Elements
After careful analysis, problems and their core elements should be explicitly stated and listed in order of importance. Finding and recording problems and their core elements can be difficult. It is not uncommon studying a company for the first time for the student to view the company as a description of a situation in which there are no problems. However, careful analysis should reveal symptoms, which lead to problem recognition (please remember that there are no perfect companies!).
Recognizing and recording problems and their core elements is most critical for a meaningful analysis. Obviously, if the root problems are not explicitly stated and understood, the remainder of the analysis has little merit since the true issues are not being dealt with.
Formulate, Evaluate, and Record Alternative Courses of Action
This step is concerned with the question of what can be done to resolve the problem defined in the previous step. Generally, a number of alternative courses of action are available which could potentially help alleviate the problem condition. One authority suggests three to seven alternatives as a reasonable number of alternatives to work with. Another approach is to brainstorm as many alternatives as possible initially and then reduce the list to a workable number. Sound logic and reasoning are particularly important in this step. It is critical to avoid alternatives that could potentially alleviate the problem but that at the same time create a greater new problem or require greater resources than the firm has at its disposal.
After serious analysis and listing of a number of alternatives, the next task is to evaluate them in terms of their costs and benefits. Costs are any output or effort the firm must exert to implement the alternative. Benefits are any input or value received by the firm. Costs to be considered are time, money, other resources, and opportunity costs, while benefits are such things as sales, profits, goodwill, customer and employee satisfaction.
Select, Implement, and Record the Chosen Alternative Course of Action
In light of the previous analysis, the alternative is now selected that best solves the problem with a minimal creation of new problems. It is important to record the logic and reasoning that precipitated the selection of a particular alternative. This includes articulating not only why the alternative was selected but also why the other alternatives were not selected.
No analysis is complete without an action-oriented decision and plan for implementing the decision. The accompanying checklist indicates the type of questions that should be answered in this stage of the analysis.
What possible alternatives exist for solving the firm’s problems?
What limits are there on the possible alternatives? Competence? Resources? Management preference? Social responsibility? Legal restrictions?
What major alternatives are now available to the firm? What management concepts are involved that affect these alternatives?
Are the listed alternatives reasonable given in the firm’s situation? Are they logical? Are the alternatives consistent with the goals of the management program? Are they consistent with the firm’s objectives?
What are the costs of each alternative? What are the benefits? What are the advantages and disadvantages of each alternative?
Which alternative best solves the problem and minimizes the creation of new problems given the above constraints?
Conclusion – The Chosen Alternative
From the discussion it should be obvious that good analyses require a major commitment of time and effort. Individuals must be highly motivated and willing to get involved in the analysis and discussion if they expect to learn and succeed in a financial analysis of a company. Persons with only passive interests who perform “night before” analyses cheat themselves of valuable learning experiences which can aid them in their careers. Performances such as these will not earn a high grade for this part of the class.
What must be done to implement the solutions/recommendations?
What personnel will be involved? What are the responsibilities of each?
When and where will the solutions be implemented?
What will be the probable outcome?
How will the success or failure of the solutions be measured?
Based on these proposed solutions, should you buy stock in this company? Sell stock in the company if you own it? Or, should you hold the stock currently in order to sell at a later date if you already owned it?
Pitfalls to Avoid in Financial Analysis for Companies
Below is a summary of some of the most common errors analysts make when analyzing companies. When evaluating your analysis or those of others, this list provides a useful guide for spotting potential shortcomings.
Inadequate definition of the problem. By far the most common error made in financial analysis is attempting to recommend a course of action without first adequately defining or understanding the problem. Whether presented orally or in a written report, a financial analysis must begin with a focus on the central issues and problems represented in the company. Closely related is the error of analyzing symptoms without determining the root problem.
The search for “the answer”. In financial analysis there are no clear-cut solutions. Keep in mind that the objective of this analysis is learning through discussion, exploration, and the search for intelligent questions. There is no one “official” or “correct” answer to a financial analysis. Rather, there are usually several reasonable alternative solutions.
Not enough information. Analysts often complain that there is not enough information in some companies to make a good decision. However, there is justification for not presenting “all” of the information in a company. As in real life, a manager or consultant seldom has all the information necessary to make an optimal decision. Thus, reasonable assumptions have to be made, and the challenge is to find intelligent solutions in spite of the limited information.
Use of generalities. In analyzing companies, specific recommendations are necessarily not generalities. For example, a suggestion to increase the price is a generality, a suggestion to increase the price by $1.07 is a specific.
A different situation. Considerable time and effort are sometimes exerted by students contending that “If the situation were different, I’d know what course of action to take” or “If the marketing manager hadn’t already fouled things up so badly, the firm wouldn’t have a problem”. Such reasoning ignores the fact that the events in the report have already happened and cannot be changed. Even though analysis or criticism of past events is necessary in diagnosing the problem, in the end, the present situation must be addressed and decisions must be made based on the given situation and the future.
Narrow vision analysis. Although companies are often labeled as a specific type of industry or management style, this does not mean that other variables should be ignored. Too often students ignore the effects that a change in one management element (e.g. investment) will have on the others (e.g. financing).
Realism. Too often analysts become so focused on solving a particular problem that their solutions become totally unrealistic. For example, suggesting a $1 million advertising program for a firm with a capital structure of $50,000 is an unrealistic solution.
The business research solution. A quite common but unsatisfactory solution to financial analysis in business research, for example, “The firm should do this or that type of business research to find a solution to their problem.” Although business research may be helpful as an intermediary step in some situations, business research does not solve problems or make decisions. In companies where business research is recommended, the cost and potential benefits should be fully specified in the financial analysis.
Premature conclusions. Analysts sometimes jump to premature conclusions instead of waiting until their analysis in completed. Too many analysts jump to conclusions upon first reading the company introduction and then proceed to interpret everything to justify their conclusions, even factors that are logically against it.
