[SOLVED] FIR 3410 Assignment One – Financial Statement Analysis
FIR 3410 Assignment One – Financial Statement Analysis
You are interning to gain experience at an investment firm to see if a career as a stock analyst is right
for you (or you can imagine you are an individual investor trying to determine whether Tesla is a good
company to add to your stock portfolio). Your supervisor has asked you to do research on the company
Tesla and prepare a report to present at the next investment department meeting.
This assignment allows you to apply financial analysis techniques from the textbook to a publicly traded
company. For this project, we will analyze Tesla’s financial statements using ratios to benchmark and
make comments about the financial status of the firm. Use this assignment to demonstrate that you have
learned what each ratio measures.
In this first assignment, you’ll focus on financial analysis for Tesla and in the second assignment will work on a
valuation report. You can see examples of equity valuation reports in eLearn.
First, review the financial data provided on Tesla’s 2020 Annual Report:
The use the financial statements to:
– Calculate the ratios
– Interpret the ratios
– Analyze what these ratios mean or indicate for the firm
You can use the links in the table of contents of the annual report to click directly to the financial
statements (Part II: Item 8 in the table of contents). Scroll down to the balance sheet. After the balance
sheet, you’ll see the Statement of Operations which is the Income and Expense statement. Use these
financial statements to calculate the ratios below.
Please include the formula and the figures you use from the financial statements.
Example: Cash Ratio = Cash/Current Liabilities = $40,000/$100,000 = 40%.
Showing your work will allow me to award partial credit and more accurate feedback if one of your ratios is
incorrect. For ratios that require a share price, use Yahoo Finance to look up the share price on the day that the
annual report and earnings announcement occurred. For ratios that require depreciation, use the amount
reported for “Depreciation and amortization” in the Consolidated Statements of Cash Flows.
For ratios that require shares outstanding, use the weighted average diluted shares outstanding. Firms report a
“weighted average” to account for the number of shares outstanding changing during the year. Firms also report
a diluted number to account for additional shares that can be issued from the conversion of existing securities
(such as employee stock options, restricted share units, etc.). Such conversion is important to account for as it
dilutes a current shareholder’s ownership stake. Thus, you should understand the difference between EPS and
diluted EPS. The latter is the one most analysts use because it accounts for additional shares that can be issued
fromthe conversion of existing securities.
The benefit of doing an assignment like this is that you appreciate the many nuances that exist when
computing the ratios when compared with the textbook examples where allthe information is given to you. An
extremely important part of the financial statements are the Notes that accompany the statements. These notes
may describe main accounting policies that underlie the reported numbers or how the firm computed its
earnings per share. These are but a few examples but it should give you an idea of the importance of the notes
that accompany the financial statements.
To get full credit for the assignment, you should complete each of the FOUR steps below.
1. Calculate each ratio
2. Interpret the ratios (in one or two sentences per ratio) and comment on the financial condition of Tesla
in each of the five categories listed above.
3. Decompose the ROE using Du-Pont Analysis, i.e., decompose ROE into:
ROE = Profit Margin * Total Asset Turnover * Equity Multiplier
= (NI/Sales) * (Sales/TA) * (TA/TE)
4. Compare each component of ROE from the Du-Pont Analysis above for Tesla’s most recent fiscal
year with its prior fiscal year(s) to understand any trends. Make sure to comment on any significant
changes or any areas that warrant further examination.
5. EXTRA CREDIT: Decompose the ROE using the extended Du-Pont Analysis.
We know that ROE = Net Income/Sales x Sales/Assets x Assets/Equity (see ratio chart above)
An interesting thing to note here is that if we cross out our matched numerators and denominators, we end up
with the simple equation:
Return on Equity = Net Income/Equity, which is very intuitive to view as income over equity.
Each of these components can be calculated as follows:
ROE= EBIT/Sales x EBT/EBIT x NI/EBT x Sales/TA x TA/TE
The first three ratios together should equal the overall profit margin of the firm (NI/Sales). It is just further
broken down so you can see a couple of things:
– The first ratio EBIT Margin tells us about the operational profitability of the firm
– The second tells us about the financing structure of the firm, i.e. how much is interest paid on debt affecting
– The third ratio Tax Burden tells us about the impact of taxes on our profit
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