Calculation of Financial Ratios for Arrow and Plume Inc

VOCABULARY AND PRACTICE OF ORGANIZATIONAL FINANCE
The purpose of the Session Long Project in TUI classes is to give you the opportunity to explore the applicability of the Module to your own life, work, and place in space and time, and to experiment with the Module to see how the otherwise academically rigorous presentation of a topic may, with more or less work and/or trauma, become "up close and personal". This is done in a number of different ways -- sometimes cumulative papers, sometimes practical hands-on experimentation with a tool of some sort, sometimes reflections on a place of work or life. The common thread is personal application, aimed at demonstrating a cumulative knowledge and understanding of the course's material.
For this course, the Project will take the two forms. In some modules, you'll be "learning by doing", actually practicing the kind of work of financial managers by manipulating numbers as they do. Please don't be scared by the math involved; most of the calculations are actually fairly simple once you've located the relevant input data in the relevant statements.
In other modules, you'll be visiting online with an Internet-based financial management system, and learning about what it does by walking through some activities there (if you actually do office-type work for a living, this may seem depressingly like going to work, but if you do something more entertaining regularly, such as motocross or test piloting, you might find it relaxing). You will then present a short report of your experience and what you learned from it.
The project assignment for module one involves the actual calculation and interpretation of some of the financial ratios you've been reading about. If you haven't reviewed them yet please see this presentation on financial ratios and this this chapter on financial analysis. There are two companies I want you to look at - Arrow Company and Plume Inc. Perform a basic financial analysis of each company by calculating the following ratios:
Rate of return on Equity (ROE) = Net Income / Shareholders' Equity
This ratio can be re-written as a product of the three principal components:
ROE = (Net Income/Sales) x (Sales/Assets) x (Assets/Shareholders' Equity)
The three components are actually: profit margin, asset turnover, and financial leverage, respectively.
Return on Assets (ROA) = Net income/Total Assets
Gross Margin = Gross profit/Sales
Inventory turnover = Cost of goods sold / Ending inventory
The Collection Period = Accounts receivable/Credit sales per day, where credit sales per day (or simply "sales per day" are computed by dividing total sales for the year by 365.
Fixed-asset turnover = Sales/Total fixed assets
Financial leverage ratios:
Debt-to-assets ratio = Total liabilities/Total assets
Debt-to-equity ratio = Total liabilities/Shareholders' equity
Liquidity ratios:
Current ratio = Current assets/Current liabilities
Acid test = (Current assets - Inventory)/Current liabilities
When you have finished your calculations, summarize them in a brief (2-3 page) report. The actual calculations should be in table format and be sure to show how you did the math. I will give partial credit for having a part of the calculation correct!
Then describe in words any conclusions that you can draw by comparing the ratios of the two companies. Which company seems to be in better financial health and less risky? If you have trouble drawing a conclusion at least tell us a little bit about what you tried to look for. On the basis of one module, you won't have the skill necessary to make a very sophisticated analysis, but at least you can get a sense of how analysts look at the numbers and make them into meaning.
Please conclude your project report with a paragraph or so describing your overall reaction to the exercise, what you got out of it and didn't get out of it, and any suggestions you have about how you can strengthen it for learning purposes. This latter part will not be graded, except in terms of its presence or absence -- it's more for guidance and assistance to the faculty in trying to make this course work as well for you as it possibly can.
Please use the following format for the paper: Mod 1 SLP format. You just need to put the ratio calculations into a table and then provide a written section on your comparison and interpretation. Having each of the ratios side-by-side in a table will help you with the comparison.
SLP Assignment Expectations
Use information from the modular background readings as well as any good quality resource you can find.
LENGTH: 2-3 pages typed and double-spaced.
The following items will be assessed in particular:
Your ability to correctly calculate the financial ratios;
Your ability to interpret the ratios and determine the financial health of the companies.
Also, developing good communication skills through proper writing is an important aspect of your education at TUI. Therefore, writing will figure into you assignment grade. Review the following resources on proper writing:
TUI: Elements of a well written paper
OWL guide to the APA format
Please be sure to incorporate these writing elements into all of your Case and SLP assignments for this course (except for SLPs where only calculations are required)!