Part 5: Ratios - Financial Statement Analysis (32 marks) You are required to do a three-year...

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Part 5: Ratios - Financial Statement Analysis (32 marks) You are required to do a three-year comparative analysis of the financial statements of a public Canadian company 1. Calculate the following...

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Part 5: Ratios - Financial Statement Analysis (32 marks)

You are required to do a three-year comparative analysis of the financial statements of a public Canadian company

1. Calculate the following ratios:

a. Current ratio

b. Inventory turnover ratio

c. Accounts receivable turnover

d. Debt to Equity ratio

e. Interest coverage ratio

f. Net profit margin

g. Return on Assets

h. Price/Earnings ratio

Discuss what each ratio measures and any trends or patterns that you observe. The calculations should be included in the appendix.

2. Using appropriate ratios, make a case for and against investing in the company’s common shares.

3. Based on your analysis, list reasons for and against lending money to the company. Use relevant ratios to support your argument.

4. Examine the company’s Statement of Cash Flows for the current and previous year. Does the company generate sufficient cash from operating activities to finance its investing activities? If not, discuss how the cash deficiency is met.

Note: If you do not use the most three recent audited financial statements, you will get 0 on parts 4 and 5.

How to access the financial statements of a public Canadian company

Step 1: Go to the website http://www.sedar.com/

Step 2: Select the preferred language (English)

Step 3: On the top of the SEDAR homepage, click on SEARCH DATABASE

Step 4: Under search database, click on Search for Company Documents

Step 5: Next, enter the name of the public Canadian company or choose an industry.

-Also, select Financial Statements from the pull-down menu (Document Type)

-Date of Filing, enter January 1, 2015 (From) to access the latest financial statements

-Click on Search

Step 6: For financial statements, make sure you select the latest Audited Financial Statements. Do not choose Interim Financial Statements.

Additional resources

Additional resources to help you with this task include the following:

Writing Handbook

Surviving the Group Project: A Note on Working in Teams

Financial Analysis Assignments

Working with Annual Reports

Financial Statement Analysis Primer

Answered Same Day Aug 16, 2020

Preeta · Accepted Answer

Husky Energy Inc., which is Canada’s largest petroleum company, has been chosen for this project.
1.  The ratios for three years have been calculated:
(a) Current Ratio – It is one of the liquid ratios. It actually analyses the firm’s ability to pay off its short term obligations that is the ability to pay off current liabilities with current assets. The three year current ratios are fairly good and is increasing over the years. 	
	
	2017
	2016
	2015
	Current Ratio
	1.60
	1.35
	0.76
(b) Inventory Turnover Ratio – This ratio analyzes the ability of the company to handle its manufacture goods or how long cash is tied up in raw materials. For this company, the inventory ratio is on higher side, that is a bit overstocking is there, which can be slightly reduced.	
	
	2017
	2016
	2015
	Inventory Turnover Ratio
	7.56
	5.02
	7.25
(c) Accounts Receivable Turnover Ratio – This ratio shows how often the company recovers its accounts receivable. The ratio also shows how efficiently the company utilizes its asset. For this company the ratio is quite high so it depicts that it is efficient in collecting its accounts receivables.
	
	2017
	2016
	2015
	Accounts Receivable  Turnover Ratio
	16.73
	12.60
	14.00
 
(d) Debt Equity ratio – this ratio shows the proportion of shareholder’s equity and debt used to finance the company’s assets. It’s a kind of leverage ratio. In 2015, the ratio was comparatively high showing the high proportion of debt being used, but it was then reduced in 2016 and was stable in 2017.
	
	2017
	2016
	2015
	Debt Equity Ratio
	0.29
	0.29
	0.36
 
(e) Interest Coverage ratio – This ratio shows the capability of the company to pay its interest expenses on the outstanding debts out of its profit. The company’ s condition of this ratio isn’t good, it was negative in 2015, increased in 2016 but then again decreased in 2017.
	
	2017
	2016
	2015
	Interest Coverage Ratio
	2.08
	3.34
	-17.

Part 5: Ratios - Financial Statement Analysis (32 marks) You are required to do a three-year comparative analysis of the financial statements of a public Canadian company 1. Calculate the following...

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