BUS FPX 4070 Assessment 1 Investment Analysis and Forecasting
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BUS FPX 4070 Assessment 1 Investment Analysis and Forecasting

BUS FPX 4070 Assessment 1 Investment Analysis and Forecasting

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Capella university

BUS-FPX4070 Foundations in Finance

Prof. Name

Date

Part 1: Ratio Analysis

Ratio XYZ Inc. Industry Average
Current 1.43 2.0x
Quick 1.07 1.3x
Days Sales Outstanding 68 days 35 days
Inventory Turnover 12.86 6.7x
Total Assets Turnover 1.61 3.0x
Profit Margin 1.7% 1.2%
ROA 2.7% 3.6%
ROE 6.8% 9.0%

1) Current

Current assets / current liabilities = $500,000 / $350,000 = 1.43

Quick (current assets – inventory) / current liabilities = ($500,000 – $125,000) / $350,000 = 1.07

Days sales outstanding (receivables / revenue) x 365 = ($300,000 / $1,607,500) x 365 = 68.12

Inventory Turnover = Sales / average inventory = $1,607,500 / $125,000 = 12.86

Total Assets Turnover = Net sales / average total assets = $1,607,500 / $1,000,000 = 1.61

Profit Margin = Net income / net sales = $27,300 / $1,607,500 = 0.017

ROA = Net income / average total assets = $27,300 / $1,000,000 = 0.027

ROE = Net income / shareholders’ equity = $27,300 / $400,000 = 0.068

2) DuPont

The DuPont analysis, as outlined by Hargrave (2022) and Wall Street Prep. (2022), helps to identify a company’s strengths and weaknesses and can be calculated using the formula:

Net income x Revenue x Total Assets
Revenue Total Assets Shareholders’ Equity
Or
Net profit margin x Asset Turnover x Equity Multiplier

XYZ Inc.: 0.017 x 1.61 x 2.5 = 0.068
Industry: 0.012 x 3 x 2.5 = 0.09

3) Strengths and Weaknesses

Current and quick ratios indicate the company’s strength relative to industry averages, though slightly below, suggesting a minor weakness. Inventory turnover is a significant strength for XYZ Inc., exceeding industry standards, while asset turnover is a notable weakness. Profit margin surpasses industry norms, indicating strength, whereas ROA and ROE fall below industry averages, indicating areas of weakness.

4) Validity of Ratio Analysis

Doubling sales, inventories, and equity would likely impact the validity of the ratio analysis. While some ratios may approach industry averages, others would worsen, resulting in unreliable numbers.

Part 2: Investment Analysis

Various qualitative factors, such as core business, corporate governance, management quality, and competitive advantage, must be considered before investing, as noted by Mukhopadhyay (2022). Financial ratios, highlighted by Kennon (2022), including P/E ratio, asset turnover, and profit margin, are crucial for investment decisions. Non-financial factors such as climate issues, staff motivation, and market trends, as emphasized by Hybrid Accountant (2022), also play significant roles.

Part 3: Forecast

When forecasting revenue, analyzing annual reports, balance sheets, and inventory levels is essential, as stated by Zucchi (2022). Profitability can be determined by examining net turnover and expenses, per IONOS (2019). Qualitative methods are preferred for forecasting due to market unpredictability, as noted by Boyles (2022), with factors such as company reputation, staff motivation, and market trends being crucial considerations.

References

Hargrave, M. (2022, August 29). Dupont Analysis: The Dupont Formula Plus how to calculate and use it. Investopedia. Retrieved September 1, 2022, from https://www.investopedia.com/terms/d/dupontanalysis.asp

Mukhopadhyay, S. (2022, June 20). Qualitative factors in valuation. WallStreetMojo. Retrieved September 1, 2022, from https://www.wallstreetmojo.com/qualitative-factors-valuation/

Kennon, J. (2022, January 13). Understanding the most important financial ratios for new investors. The Balance. Retrieved September 2, 2022, from https://www.thebalance.com/financial-ratio-guide-357501

Hybrid Accountant. (2022). Investment appraisal-8 non-financial factors that every accountants and managers should consider. Retrieved September 2, 2022, from https://accountantnextdoor.com/investment-appraisal-8-non-financial-factors-that-everyaccountants-and-managers-should-consider/

BUS FPX 4070 Assessment 1 Investment Analysis and Forecasting

Zucchi, K. (2022, February 8). Stock analysis: Forecasting revenue and growth. Investopedia. Retrieved September 2, 2022, from https://www.investopedia.com/articles/activetrading/022315/stock-analysis-forecasting-revenue-and-growth.asp

IONOS. (2019, February 5). Profitability forecast – how to determine your company’s chances of success. IONOS Startupguide. Retrieved September 2, 2022, from https://www.ionos.com/startupguide/grow-your-business/profitability-forecast/

Boyles, M. (2022, June 21). 7 financial forecasting methods to predict business performance. Business Insights Blog. Retrieved September 2, 2022, from https://online.hbs.edu/blog/post/financial-forecasting-methods

BUS FPX 4070 Assessment 1 Investment Analysis and Forecasting

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