SCHOOL OF ARCHITECTURE, BUILDING AND DESIGN Centre for Modern Architecture Studies in Southeast AsiaFoundation of Natural and Built Environments (FNBE)

Basic Accounting [ACC30205/FNBE0145]Prerequisite: None Lecturer: Chang Jau Ho

Assignment: Financial Ratio Analysis 30% Group WorkSubmission: by 12pm, Friday, 4th June 2015 (Week 16)

IntroductionThe assignment will assist students in developing a better appreciation in ratio analysis and interpretation as a tool for evaluating real-world companies. By reading and analysing the annual reports of publicly-traded companies, students can acquire valuable skills such as deciphering the various details contained in an accounting report, give informed opinions about the company’s business operations and make recommendations regarding the worthiness of the business’ common shares as an investment medium.

Objectives of ProjectThe objectives of this project:

To understand the basic purposes of ratio analysis and interpretation. To understand the techniques of applying the ratios.

Learning Outcomes of Project On successful completion of this project, students will be able to demonstrate the following:

Assess the performance of a business (in terms of profitability and financial stability) by applying financial ratio analysis.

Make appropriate business decisions with reference to various accounting information and tools.

Tasks - MethodologyYour tasks are as follows:

a) Form a group with a maximum of 3 members.b) Select a public company (domestic or international) as your research subject. Ensure

that the chosen company is engaged in trading physical goods, not services. c) Provide a brief background history of the company and its recent development. d) Conduct ratio analysis on the business annual reports for the last 2 years (e.g. 2012 &

2013) and interpret the results.e) Together with the P/E ratio (see appendix for more information), provide justifications

on whether the company’s shares are worthy of investment.

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f) Submit your findings in a report with a maximum word limit of 1500 words, excluding references and appendices. The report must be submitted in a softcopy form.

g) Note: ensure that you have at least 5 different sources of information in the appendix.h) Note 2: Include the company’s Income (or P&L) statements and Balance Sheets for the

relevant years in your report’s appendix section. i) Important: Ensure that you quote your sources and refrain from copying. I

conduct plagiarism checks on all assignments submitted. Students caught with the said offence will face disciplinary action. Ignore this warning at your own risk.

Submission Requirement

- A 1500-word written report (excluding cover page and references) submitted in softcopy form to jauho.chang@taylors.edu.my.

Assessment criteria

The assessment for this assignment will be based on:

TGC Acquired

Assessment Criteria Marks %

Group ComponentCompany Background 5%

Ratio Calculation 10%

Ratio Interpretation 10%

Investment Recommendation 5%

TOTAL 30%

Marking criteria

Please refer to Assessment Rubric on page 3.

Assessment Rubric for Basic Accounting Assignment (ACC30205)Assessment Criteria (with

TGC)

30% Excellent (10-9) Good (8-7) Satisfactory (6-5) Poor (4-3) Fail (2– 0)

Company Provides a very well-organized

Provides a well-organized and

Provides a somewhat

Provides a disorganized and

Background history of the firm

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Background5%

and easy-to-understand background history of the firm.

easy-to-understand background history of the firm.

organized and understandable background history of the firm.

somewhat hard-to-understand background history of the firm.

is presented in a very disorganized and difficult-to-comprehend manner.

Ratio Calculation 10%

All the calculations performed are correct with reference to the formulas and accounting report data.

There are 1-2 calculation mistakes in terms of misapplication of formula or using the wrong data.

There are 3-4 calculation mistakes in terms of misapplication of formula or using the wrong data.

There are 5-6 calculation mistakes in terms of misapplication of formula or using the wrong data.

There are 7 or more calculation mistakes in terms of misapplication of formula or using the wrong data.

Ratio Interpretation

10%The student demonstrated excellent understanding of the ratios i.e. interpreted all the calculation results correctly.

The student demonstrated good understanding of the ratios i.e. interpreted most of the calculation results correctly.

The student demonstrated adequate understanding of the ratios i.e. interpreted at least half of calculation results correctly.

The student demonstrated poor understanding of the ratios and interpreted a majority of the calculation results incorrectly..

The student demonstrated very poor understanding of the ratios and interpreted almost all of the calculation results incorrectly.

InvestmentRecommendation

s 5%

The student provided her investment recommendations based on excellent justifications.

The student provided her investment recommendations based on good justifications.

The student provided her investment recommendations based on mediocre justifications.

The student provided her investment recommendations based on poor justifications.

The student provided her investment recommendations based on very poor justifications.

Appendix 1: P/E RatioPrice/Earning or P/E Ratio

= Current share price Earnings per share (in number of times)

For example: Company B’s current share price is $5.00 per share. It’s earning’s per share (based on the latest year) is $0.50. This means the company’s price/earning ratio is 10 ($5.00/$0.50).

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How to interpret: This ratio measures how expensive a share is. The higher the P/E ratio, the more expensive a share is. In the example above, a P/E of 10 means that an investor will need to wait for 10 years to recoup his investment. A higher P/E, say 20, means the investor will have to wait even longer – 20 years - to claim back his original principal. A conservative investor will normally pay no more than P/E of 15 for a share that he likes.

Appendix 2: Investment RecommendationWhen determining whether the company that you are analysing is worth investing in, you have to take into account 3 factors:

a) Profitabilityb) Stabilityc) Share price

In other words, the company must have demonstrated good profitability, strong financial stability and its shares are available at a cheap price (i.e. P/E of 15 or lower) to warrant an investment. To determine good profitability and strong financial stability, refer back to the profitability and stability ratios that you have calculated and look at the overall picture of these 2 groups of ratios. There are no hard and fast rule about what really qualifies as good profitability and strong financial stability so there is some subjectivity regarding that. However, it is useful to ask yourself (honestly) whether you think the company is profitable and stable. If the answer is not a resounding yes, then it would be wise to not invest in the company.

If you think that the company has good profitability and stability, and it is also currently available at a cheap price (i.e. P/E below 15), then you can recommend the company’s shares as suitable for investment.

Appendix 3: Other Frequently Asked Questions (OFAQs)

1. Which profit figure should I use to calculate ratios like Profit Margin, Return on Equity, etc.?You can use either the profit figure before deducted by the tax expense (commonly known as operating profit) or the profit figure after deducted by tax (also commonly known as consolidated net profit). Just make sure to use the same figure to calculate all the ratios that require this figure.

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2. I can’t calculate the Selling Expense Ratio and the General Expense Ratio because the selling expenses and the general (or administrative) expenses have been added up together and shown as one single amount in the P&L statement. What should I do?You can go through the Notes Section of the Annual Report and see if the company provides a breakdown of that lump sum figure. Failing that, you may divide the lump sum figure by 2 and ‘pretend’ that half of the lump sum figure is the total selling expenses and the other half is the total general expenses.

3. Where can I find the share price of the company I’m researching?If the company is Malaysian, you can find it in the Business section of the Star Newspaper. If the company is foreign, you can look up Yahoo Finance or CNBC.com. And oh, to calculate the P/E ratio, please use the latest share price, as in no more than 5 days before the submission date.

4. Which Earnings per Share (EPS) figure should I use? Diluted or Basic?If both figures are not very different, then it doesn’t matter. Otherwise, please use the Basic figure.

5. I can’t find the [insert name] figure/Everything looks so different from the accounting reports I’ve learned/Oh my god what the %^$&#@ am I looking at? HELP!!!!First take a deep breath… Now, try to realize that although the items’ names and format used in Annual Report may be different from what you have learned so far, both of them still retained the same basic “look”. So the key is to observe closely and guess intelligently what you think an item reported in the Annual Report really is. For example, if you can’t find the “Cost of Goods Sold” item in the Annual Report, try and think where it is normally located in the P&L statement. Chances are it is still at the same usual “place” but has been given a different name. Get it?

6. Can I ask/email you for help? I’m kinda stuck with this assignment.Of course. However, please be advised that most of the time I will only give you hints, not straight answers to your queries

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