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Accounting is often described as "The Language of Business." Do you speak the language? Specify what you believe are the three most important financial ratios that might help you assess the strength of a firm. These ratios are listed towards the end of chapter 15 under the section titled, "Financial Ratios." Also, tell what each ratio explains about the firm. Do you think these ratios can be manipulated? If you do, tell also what can be done to counter such manipulation.

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Keith Leannon
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1 Aug 2019

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Book: Financial management

1. Review the requirements of the Chapter 3 Mini-Case, parts b through j. Then apply those requirements to do an analysis of Brinker International, which is a real company. Don't complete the minicase itself, just Brinker. Do the analysis on the basis of the figures for the most recent year. For part g, use the 2 most recent years. Download 10K financial statements for the most recent year for Brinker. A good source is the company's home page. Also compare the Brinker ratios to the industry averages and commend on significant differences. You'll note that some of the company's ratios you calculate won't agree with those found on the web page. Ratios are calculated in different ways, however, you should use the formulas in the text. Also, you won't find all of the industry averages, but you will find most of them. You'll need the company's stock price for several of the ratios; use the fiscal year end price. The company's stock symbol is EAT.

(Visit Brinker web site) (Links to an external site.)

(Access industry averages) (Links to an external site.)

Note:

All quantitative work must be done in Excel; Word is not acceptable. You can download Brinker's 10K (annual financial statements they send the Securities and Exchange Commission each year) at the following site:

http://phx.corporate-ir.net/phoenix.zhtml?c=119205&p=irol-sec

You then need to take the various items off the financial statements such as Revenues, Inventory, etc. and calculate the ratios to answer the case questions.

b. calculate the 2014 current and quick ratios based on the projected balance sheet and income statement data. What can you say about the company’s liquidity position in 2012, 2013, and as projected for 2014? We often think of rations as being useful 1. To managers to help run the business, 2. To bankers for credit analysis, and 3. To stockholders for stock valuation. Would these different types of analysts have an equal interest in the liquidity ratios?

c. Calculate the 2014 inventory turnover, days sales outstanding, fixed assets turnover, and total assets turnover. How does Brinker utilization of assets stack up against that of other firms in its industry?

d. calculate the 2014 debt ratio, liabilities to assets ratio, times-interest-earned, and EBITDA coverage ratios. How does Brinker compare with the industry with respect to financial leverage: what can you conclude from these ratios:

e. Calculate the 2014 profit margin, basic earning power, return on assets, and return on equity. What can you say about these ratios?

f. Calculate the 2014 price/earnings ratio, price/cash flow ratio, and market/book ratio. Do these ratios indicate the investors are expected to have a high or low opinion of the company?

g. Perform a common size analysis and percentage change analysis. What do these analyses tell you about Brinker?

h. use the extended DuPont equation to provide a summary and overview of Brinker’s financial condition as projected for 2014. What are the firm’s major strengths and weaknesses?

i. What are some potential problems and limitations of financial ratio analysis?

j. What are some qualitative factors that analysts should consider when evaluating a company’s likely future financial performance.

Staying Alive in Tough Economic Times

Going broke is an idea that any business hates to think about. However, if you are going to go broke in the United States, it helps to be a large, established company. For example, after the September 11, 2001, terrorist attacks, the government stepped in and saved major air carriers like American and United. More recently quasi-government agencies like Fannie Mae and Freddie Mac received money from the government to stay afloat despite poor practices in the mortgage business. Banks that risked capital on risky investments like derivatives and credit swaps were also beneficiaries of the federal government’s largesse. Even automakers whose managers misjudged the market were propped up by government dollars. Which leads us to the question, “What if small-business owners run out of cash?”

The simple answer is, it’s goodbye to the business. That’s why having enough cash on hand (liquidity) is especially critical for entrepreneurs during economic tough times. Unfortunately, this is no simple task. Liquidity for small companies can change almost immediately due to some unexpected event such as a major customer going out of business or perhaps an unexpected natural catastrophe like a flood. Experts agree that keeping enough liquid assets (like cash and cash equivalents like bonds) to fund the next six months is a good rule of thumb. If you keep a reserve of liquid assets, you have time to work on a remedy if a crisis hits rather than having to close your doors.

Accountants and financial managers also advise small businesses to be particularly aware of three ratios to make sure the business is liquid enough to survive: current ratio, quick ratio, and the debt-to-equity ratio.

Current ratio: current assets divided by current liabilities. Most bankers like the ratio to be at least 2:1.

Quick ratio: cash and receivables divided by current liabilities. This ratio addresses the scary question of whether or not a company can meet its obligations if sales suddenly fall or dry up. A ratio greater than 1:1 is often acceptable.

Debt-to-equity ratio: total liabilities divided by shareholders equity. The higher this ratio is the less likely bankers can deal with you. A ratio below 3:1 is often considered safe for small businesses.

Locating corporate annual reports is easier than it has ever been. AnnualReports.com (Links to an external site.)Links to an external site. hosts a website (www.annualreports.com/ (Links to an external site.)Links to an external site.)[i] containing annual reports for hundreds of corporations. The site is comprehensive and easy to use. You can also find publicly traded companies Annual Report on their websites, usually under "Investor Information".

Go to the website (www.annualreports.com/ (Links to an external site.)Links to an external site. ) and choose one company to research. Use the information given in this report to answer the following questions. (Sometimes the Web address for a location changes. You might need to search to find the exact location mentioned.)

1. What is the name of the company?

2. What is the financial year?

3. Calculate the three financial ratios discussed above and listed below and the additional calculations below. Show your work for the ratios. Provide a link to the Annual Report or source you used for the financial information.

a. What is the current ratio?

b. What is the quick ratio?

c. What is the debt-to-equity ratio?

d. On their Balance Sheet, find their Total Assets. What is the total?

e. On their Balance Sheet, find their Total Liabilities. What is the total?

f. On their Income Statement, find their Total Revenues. What is the total?

g. On their Income Statement, find their Total Income. What is the total?

4. Reflect on these calculations. What do they tell you?

Prepare a Project Proposal that includes the nature of the project, the sources of information you plan to use, and the most important concepts and techniques to be applied.

The outline topics should include the following:

A brief summary of the company you have chosen, such as business lines, and its industry;
Information sources (e.g. industry studies, market share reports, financial statements, etc.);

The analyses you will include in your study. This will likely require a summary review of the material in later sections of the course, such as competitor analysis;

If you have access to, and permission to use, internal company documents, please discuss so in the outline.

You are required to complete a course project that reveals mastery in application of the strategic managerial accounting and performance management concepts emphasised in the course. This involves reporting on a specific organisation within an industry, analysing the firm’s competitive position (e.g., market position, cost competitiveness, market power, innovation, SWOT, etc.), its managerial accounting approach, and the non-financial performance metrics should be used in monitoring firm performance, all aligned with value creation for the chosen firm.

This project should be a formal business report that covers all elements of the strategic management process: mission statement, strategic goals, strategic objectives, actionable plans (if available, analyse the specific budget planning process used by the Firm; if not, search for relevant articles for the subject company and recommend a process that you believe is appropriate for the company), and performance monitoring processes employed by the Firm, including its board of directors. These processes and strategies are to be supported with managerial accounting and performance management concepts.

In selecting a company to analyze, first focus on information availability. If you work for the company, ensure that you can obtain the information required to do a proper job on this assignment. If you choose a company you do not work for, begin your search among larger public companies with ample information available. Company websites are often the best place to begin, in particular the investor relations site. Look for annual reports, quarterly reports, press releases, white papers, and other sources of information (e.g., public filings, such as for the U.S. Securities & Exchange Commission at http://www.sec.gov./

Your tasks are to:

· Briefly describe the business of the Firm (i.e. industry segments, geographic service area, market position, and size as measured by revenues, employees, and market capitalisation). Describe the mission statement and strategic objectives of the Firm.
· Analyse the behaviour of expenses of the business, distinguishing between variable costs and fixed costs (or estimates thereof), describe the relationships between sales volume, costs, and profit. Estimate a break-even point for the Firm and support with relevant calculations and discussion.

· Discuss the level of the Firm’s operating leverage.

· Assess the budgeting process and procedures for the Firm, bearing in mind the context of the business and its characteristics. Identify methods employed for budgeting, managerial reporting, and control, and make recommendations for improvement. Justify your recommendations.

· Summarise the Firm’s performance over the past five years in terms of sales and earnings growth, return on equity, return for shareholders, and non-financial performance measures (e.g. market share, recognition, customer satisfaction).

· Analyse the fixed capital needs (i.e. capital expenditures) of the company, and discuss significant capital projects, how they fit with the strategic goals of the Firm. Evaluate risks associated with major capital projects and suggest risk mitigation strategies. Justify your suggestions.

· Briefly profile two or three key competitors and analyse the basis for competition (e.g., is it cost? Innovation? Capital intensity? Branding?). Compare the Firm with these key competitors on key performance metrics (e.g., revenue growth, profit margins, return on equity, financial leverage, receivables turnover, payables turnover, asset turnover, operating costs, market share, market share growth, etc.). Identify areas where the Firm may outperform or underperform the peer group, and suggest improvements for weaknesses.

· Design a Balanced Scorecard for the Firm.

This project should follow a structured approach and should be prepared and presented as a professional business report.

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