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by | Nov 13, 2022 | Accounting

 

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FSA No. 2 – Instructions
This is your second FSA assignment.. This FSA is related to Chapters 7 thru 12, hence, you might have to read up on these ratios in upcoming chapters. These metrics are crucial for any investor, lender, or borrower.
They provide the public with a clear measurement of a corporation’s current status. With this
information, interested parties can begin to dig into a company’s financial position at a particular point
in time. These measurements are just a quick start in reviewing a company. Much depends on future
projections, type of industry, investor goals, risk tolerance, etc. Think of the below as the building blocks
to wiser investing.
Please start your report by showing the formulas and calculations for General Mills and Kellogg’s. Briefly explain what each metric tells us. Then read through the annual reports. The Notes to the Financial Statement provide lots of information. Read the President’s Letter and google company earnings announcement.
Look at the company results. Comment on any significant differences. See if you can cite some reasons from your reading of the annual reports and relevant pages of the 10K. Prepare a minimum 3 page report on top of the cover page. Refer to Chapter 13 for more information.
Attached is how to format the calculation on you cover page.
Return on Equity (ROE) = Net Income / Average Total Stockholders’ Equity
Return on Assets (ROA) = Net Income / Average Total Assets
Earnings per Share (EPS) = Net Income / Average Outstanding Shares
Net income divided by the weighted average of outstanding common shares. This tells us how many
dollars are available to pay ever dividend, should a company elect to do so.
Quality of Income = Cash Flows from Operations / Net Income
Price to Earnings Ratio = Market Price per Share / Earnings per Share
This is a key metric for investors. Dividing the market price of a common stock by the net income how
much income is earned relative to the market price of the stock. A ratio of 20:1 tells investors it would
earn 5% based on the current market price.
Dividend Yield Ratio = Dividends per Share / Market Price per Share
Annual dividend per share divided by the market price of a common share of stock. This percentage can
be compared to other dividend and interest payable vehicles. This is amount of money you earn
annually by holding on to a share of common or preferred stock.
Operating Profit Margin = Operating Income / Net Sales
Page one of your FSA will clearly show the above formulas along with the numbers for General Mills and
Kelloggs. Please lay it out per the below template. Then address each of the five metrics. What do they
mean? Which company has better looking numbers and most importantly why? Here is where the Notes
to the Financial Statements come into play. The annual report will discuss all of the above in detail. A
google source could be a search for earnings announcements. Check out a few investment houses like
Motley Fool. Investopedia, and my favorite, Merrill Lynch. You will find tons of opinions, analyses,
comments, etc. Two to four pages after the cover sheet seem reasonable to present your thoughts. Set
decimals exactly as you see here.
TEMPLATE FOR THE EXCEL RATIO SHEET/COVER PAGE

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