MT217_unit3.group.assignment.Team1

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Purdue Global University *

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217

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Finance

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Jan 9, 2024

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1 Unit 3: Financial Statement Ratios Analysis Team #1 Purdue University Global MT217: Finance Professor Jeffrey Adair September 12, 2023

2 Unit 3: Financial Statement Ratios Analysis This paper is an assessment of ABC company’s performance. The analysis focuses on the five critical ratio classifications. These are liquidity, activity, financing, market value, and profitability. A close look at these ratios gives insights into ABC company's financial stability, operational efficiency, leverage, market valuation, and profitability trends over the three years. The evaluation supports informed decision-making and provides stakeholders with a comprehensive view of the firm's financial health and performance. The financial analysis aims to establish an institution's financial performance and growth. Part 1: Five Classifications of ABC’s financial ratios The calculation will help determine if the company can sustain itself, where improvements are needed, and progression, and degression in specific areas, and it will determine if we move forward with an acquisition. Here are the calculations for ABC company’s ratios. MT217_Unit3_Workbook team1.xlsx Part 2: Effects of the Acquisition The financial department plays a pivotal role in evaluating the potential acquisition of ABC company. The department's financial analysis and risk assessment expertise is crucial in determining the acquisition's financial feasibility and long-term sustainability. The finance department will provide in-depth financial models (Nazah et al., 2022). These include cash flow projections, return on investment calculations, and other financial analysis models. This will help in estimating the potential return on investment. The finance department has analyzed ABC company's historical financial performance, as presented in part 1. Since the department will be responsible for identifying the red flags, trends, and financial challenges that pose risks to the

3 acquisition. Our thoughts on the current ratio, based on the document above, are as follows. In the year 2013 the current ratio was 0.85, in 2014 it was 0.88 and 2015 it was 0.97. A current ratio that is lower than 1 show that this company is having a difficult time meeting short-term financial obligations. However, from 2013 to 2015 the current ratio has significantly improved. Which means that are effectively managing their current assets and liabilities. The sales department will provide information on the following aspects for valuable insights into the ABC Company’s sales and revenue. First, the potential market for ABC Company’s products or services by looking at customer demographics, market segmentation, and consumer behavior that may impact the company’s future sales performance. Second, they would provide information about the landscape in the industry. Third, the sales growth potential of ABC Company by analyzing the market position and how it compares to its competitors. Lastly, the sales force capabilities of the ABC Company. All this information can be used to analyze the potential for future revenue growth and identify any risks or opportunities that could impact the acquisition . From a marketing perspective ABC company seems to have a lower inventory turnover ratio of 8 time a year compared to an industry average of 44, which may indicate that they are suppliers to other companies in which they must hold more inventory throughout the year for their customers. Their ROE compared to the industry average is almost double even though their Gross Profit had a slight decline in 2014, their COGS consistently increased. Their average earnings per share are consistent with industry comparisons, along with having higher averages in their net profit margins and operating profit margins. Our marketing analysis approves of an investment into the ABC company based on the prior information knowing that these ratios do

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4 not show the whole picture of the company and the potential human elements that may affect marketing capabilities, and any economic factors that may affect their unit pricing/sales. As the CEO of A B C financial institution, our main responsibility is to monitor resources and support the organization's goals, which balances the revenue and the cost of doing business with HR. The responsibility of the existing staff is to manage the people who advance their goals in the company to bring the company to the next level. We also have strength in recruiting individuals for the job that's needed. However, we have a downside: if individuals are not performing their tasks, we must let them go. Our main purpose is to see that the company is progressing with the challenge and to have employees perform their duties accurately, professionally, and honestly. During the entirety of the acquisition process, our Legal Department plays a crucial part in looking out for the company's best interests by protecting our intellectual property. Their principal duty would consist of doing a comprehensive analysis of ABC Company's legal documents, including its contracts, agreements, pending or ongoing litigation, and liabilities. It is essential to uncover any hidden liabilities, as these may result in unexpected issues following the acquisition of the target company. In addition to this, they would examine ABC's portfolio of intellectual property in order to guarantee that all of the company's assets are both secure and able to be transferred. Additionally, the department would guide ABC Company through any industry-specific regulatory hurdles that it could be up against. In light of the information presented in position 1, the Legal Department would play a crucial position in the process of drafting contracts relating to the provision of technical assistance to Third World countries. This would involve verifying that all such agreements are in compliance with laws enacted at the international and regional levels. In the event that their assessments and checks come to a

5 positive conclusion and are completed within the time frame that was expected, the Legal Department will not have any objections to delay or reject the acquisition. Part 3: Overall Analysis Here is a complete study of the acquisition of ABC Company, which incorporates the year-over-year ratio analysis from Part 1 and industry average comparisons from Part 3, as well as the results of the extensive evaluations performed by the various departments. Pros: Efficiency in Operations: As was discussed in Part 1, ABC Company possesses impressive operational costs that, despite being good, offer potential for improvement. It is possible to significantly increase one's profitability through the utilization of technical help from third-world countries as well as other cost-cutting strategies. Legal Compliance Following an exhaustive investigation, the Legal Department did not locate any major obstacles that could prevent the acquisition from going forward. All of the intellectual property rights are safeguarded and can be freely transferred, and there are no regulatory roadblocks that are currently anticipated to be an obstacle. Comparative analysis reveals that ABC Company is in a competitive position based on the industry average comparisons presented in part 3. Their performance measures are in good alignment with industry standards, or even transcend them, which is a sign that their operational structure is strong. Strategic Compatibility: The acquisition of ABC Company is strategically compatible with our existing portfolio and delivers synergistic benefits in terms of market reach, product expansion, and development of our client base.

6 Cons: Integration Difficulties Despite the fact that the operational metrics of ABC Company appear to be positive, there could be difficulties in integrating their systems, procedures, and culture with ours. The integration would have to be seamless, which would involve resources such as time and money. Costs of Operations Despite the fact that there is the possibility of lowering costs of operations even more, there may initially be a requirement for an infusion of cash in order to drive these efficiencies. This may have an effect on profitability in the short term. Dynamics of the Industry: According to the average comparisons of the industry from Part 3, despite the fact that ABC Company is competitive, the industry may be facing larger macroeconomic issues or saturation. This may restrict the possibilities for future expansion following the acquisition. The liquidity in the firm has increased from 2013 to 2015 because the current ratio and quick ratio has increased over the past three years. The company’s capability to pay short-term liabilities has increased also. The quick ratio has also increased which means liquidity has increased even without including inventory. So, from our team’s analysis we show that the company may be undervalued and shows potential growth. There are areas that need improvement such as AR turnover and collection periods. Along with their debt to equity, diving further into their short- and long-term D/E ratios may give our CEO a better analysis. The ABC Company may be a higher risk investment at the beginning based on the few factors indicated within the analysis and per department. Considering both the positives and negatives of the situation, it would appear that the acquisition of ABC Company would be beneficial, primarily due to the anticipated increases in operational efficiencies and the favorable legal assessment.

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7 However, it is vital to have a strategic strategy in place for integration and to ensure that the anticipated efficiencies, in terms of cost reductions, are realized within the allotted amount of time. This may be accomplished by having a plan in place. In addition to this, it is important to take a closer look at the dynamics of the sector as well as potential constraints on growth. I would suggest moving through with the acquisition if a clearly defined post-acquisition strategy is in place. At the same time, we should make sure that we have backup plans in place to deal with any potential drawbacks.

8 Reference Nazah, K., Ningsih, A. W., Irwansyah, R., Pakpahan, D. R., & Nabella, S. D. (2022). The Role of UKT Scholarships in Moderating Student Financial Attitudes and Financial Literacy on Finance Management Behavior. Jurnal Mantik , 6 (2), 2205-2212. http://www.iocscience.org/ejournal/index.php/mantik/article/view/2781