In this assignment, you are to choose a company listed on a major stock exchange (e.g., NYSE. NASDAQ, LSE) and write a thorough financial analysis of this company. You will also need to choose its closest competitor as a benchmark company (“benchmark”), which you will use as a comparison.
You must select a company within the industry outlined in the table below.
Oil / Gas / Mining / Energy
Naturally, the "benchmark" will also be from the same industry.
In your written report, you will provide your recommendation as to whether to buy or sell the stock of this company, justifying your choice based on the arguments put forth in the body of your analysis. Your analysis, arguments, conclusions and recommendations will put together in a Word document composed of 1,500 to 2,000 words, exclusive of additional appendix, or attachments (xls or ppt) you may want to include.
The body of your report should follow the following structure:
1) Presentation of the company: a. Activity: i. Products and services offered. ii. Major geographical markets covered. iii. Names of current CEO and other key managers (if available). iv. Brief history of the company. v. Any recent meaningful development in the company.
b. Industry: i. Other major players in the industry. Which is your benchmark company? ii. Is the industry very concentrated of fragmented? Explain. iii. Approximate market share of the company. iv. Major recent changes in the industry (e.g., technology, regulatory environment)
2) Ratio Analysis Your ratio analysis should cover the last 3 years of your company, and the last year of your benchmark for comparison. Ratios to cover: a. Liquidity ratios: i. Current Ratio ii. Quick Ratio b. Asset Management ratios: i. Days Sales Outstanding (DSO) (or Average Collection Period) ii. Days Inventory (or Average Inventory Period). iii. Days Payable. iv. Total Asset Turnover (TATO).
c. Debt Management ratios: i. Debt ratio. ii. Times Interest Earned (TIE)
d. Profitability ratios: i Gross Margin (if appropriate). ii. Operating Margin. iii. Net Profit Margin. iv. Basic Earning Power (BEP). v. Return on Asset (ROA). vi. Return on Equity (ROE).
e. Market Value ratios: i. Price/Earnings ratio. ii. Price/ EBITDA ratio.
f. DuPont Analysis You should conduct your ratio analysis, category by category (a, b, c, …) by doing the following: • Define each ratio (how do you calculate each ratio it and what does it tell us). • Layout your ratios, for each category, over the past 3 years, and the ratios of your benchmark for last year, in a table as per the following example:
Liquidity Ratios: Company A Company B Year 2014 2015 2016 2016 Current Ratio 2.15 2.25 2.56 2.30 Quick Ratio 1.05 1.15 1.07 1.25
• Provide a meaningful comment regarding the trend of each ratio, and how it compares with the benchmark ratio for last year. Try to explain why this trend is taking place, or why there may be an unusual change from one year to another. Is the trend good or bad for the company? Explain.
3. WACC You are to try to calculate the company’s WACC. • Define what the WACC is and what it consists of. • What assumptions are you using to estimate the WACC? • Use the CAPM model to estimate the company’s cost of equity. • Estimate the firm’s cost of debt and, if appropriate, the firm’s cost of other capital components. • Estimate the weights of the firm’s various capital components. • Calculate the firm’s WACC.
4) Free Cash Flows (FCF’s) • Define Free Cash Flows. How do you calculate FCF’s? • Calculate the company’s FCF’s for the past 3 years
5) Value of Operations (“Enterprise Value” of EV) • Assume that the company’s FCF’s will grow by 5% per year, from 2017 onwards. • Calculate the company’s Value of Operations.
6) Conclusion and Recommendation Summarize the main points of your analysis and justify your “buy” or “sell recommendation of the company’s stock.
“Debt” is defined here as any liability in the company’s balance sheet, not just bank debt.
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