Evaluating Company Performance and Ethical Considerations.Outline 3 different comparisons an analyst may include when evaluating the performance of a company. (Not asking for specific ratios) You have been asked to evaluate investment options for a large private investment fund; identify some drawbacks to a purely fundamental (Ratio) analysis.

QUESTION

Individual  Assignment 2                               ACCT 3343

• Outline 3 different comparisons an analyst may include when evaluating the performance of a company. (Not asking for specific ratios)
• You have been asked to evaluate investment options for a large private investment fund; identify some drawbacks to a purely fundamental (Ratio) analysis.
• Consider companies in the following industries: Technology, Financial, Manufacturing. Name 2 companies within each industry, and identify 3-4 Ratios that you think would be most important within that industry (and why) and 2 Ratios that would not be important considerations (and why).
• Identify 2 -3 indicators which may act as a signal of a company’s inventory management strength.
• Comment on the relevant issues/questions/concerns/ impacts of a company who has a higher average age of long-lived assets. (comment on impact to analysis)

ANSWER

 Evaluating Company Performance and Ethical Considerations

Introduction

When evaluating the performance of a company, analysts consider various factors to gain insights into its financial health, profitability, and efficiency. In this essay, we will outline three different comparisons analysts may include, discuss the drawbacks of a purely fundamental analysis, identify companies in different industries, and analyze important ratios within each industry. We will also explore indicators of inventory management strength and comment on the impact of a higher average age of long-lived assets on analysis.

Three Different Comparisons for Evaluating Company Performance

Trend Analysis: Analysts compare financial data over multiple periods to identify patterns and trends in a company’s performance. This allows them to assess whether the company’s financials are improving, deteriorating, or remaining stable. Trend analysis provides insights into the company’s growth trajectory, profitability, and efficiency over time.

Peer Group Comparison: Analysts compare a company’s financial metrics with those of its industry peers. This allows for benchmarking and understanding how the company is performing relative to its competitors. By comparing key financial ratios and performance indicators, analysts can assess the company’s market position, competitive advantage, and potential areas for improvement.

Cross-Sectional Analysis: Analysts compare the financial performance of different companies within the same industry. This analysis provides insights into the company’s relative strengths and weaknesses compared to its industry counterparts. It helps identify outliers and highlights areas where the company may need to improve or capitalize on its competitive advantages.

Drawbacks of Purely Fundamental (Ratio) Analysis

While fundamental analysis, which involves the use of financial ratios, is valuable, it has some drawbacks. Firstly, it focuses solely on financial metrics and may not consider non-financial factors that can impact a company’s performance, such as market trends, competitive landscape, or management expertise. Secondly, it relies on historical data and may not fully capture future growth potential or industry disruptions. Lastly, it assumes that historical trends will continue, which may not always be the case in dynamic business environments.

Technology Industry

Company A: Apple Inc.

Important Ratios: Return on Equity (ROE) – measures the company’s ability to generate profits from shareholder investments; Price-to-Earnings (P/E) ratio – indicates the market’s perception of the company’s future earnings potential.
Less Important Ratio: Current Ratio – less relevant in the technology industry due to different business models and cash flow dynamics.

Company B: Alphabet Inc. (Google)

Important Ratios: Return on Assets (ROA) – evaluates the company’s efficiency in generating profits from its assets; Debt-to-Equity ratio – assesses the company’s leverage and financial risk.
Less Important Ratio: Inventory Turnover – less significant for technology companies that focus on services rather than physical inventory management.

Financial Industry

Company A: JPMorgan Chase & Co.

Ratios: Net Interest Margin (NIM) – measures the profitability of the company’s core lending activities; Efficiency Ratio – assesses the company’s ability to manage expenses relative to its revenue.
Less Important Ratio: Gross Margin – not as relevant in the financial industry as it primarily deals with interest income rather than product sales.

 Company B: Bank of America Corporation

Important Ratios: Return on Equity (ROE) – evaluates the company’s ability to generate profits from shareholder investments; Loan Loss Provision Ratio – measures the adequacy of the company’s loan loss reserves.
Less Important Ratio: Inventory Turnover – not applicable to financial institutions as they do not hold physical inventories.

Manufacturing Industry

Company A: General Electric Company

Important Ratios: Inventory Turnover – assesses the efficiency of inventory management; Gross Margin – indicates the company’s ability to generate profit from sales.
Less Important Ratio: Earnings Per Share (EPS) – less relevant as manufacturing companies may prioritize reinvesting profits for growth rather than distributing them to shareholders.

Company B: Toyota Motor Corporation

Important Ratios: Return on Assets (ROA) – evaluates the company’s efficiency in generating profits from its assets; Operating Margin – measures the company’s profitability from its core operations.
Less Important Ratio: Debt-to-Equity ratio – less significant as manufacturing companies often rely on debt to finance operations and investments.

Indicators of Inventory Management Strength

Inventory Turnover Ratio: A higher ratio indicates efficient inventory management, as it implies that the company is selling its inventory quickly and minimizing carrying costs.
Days Sales of Inventory (DSI): A lower DSI suggests that the company has a shorter inventory holding period, which reduces the risk of obsolete or outdated inventory.

Impact of Higher Average Age of Long-Lived Assets

A company with a higher average age of long-lived assets may face several issues. Firstly, older assets may require more frequent maintenance and repairs, resulting in higher operating costs. Secondly, technological advancements may render older assets obsolete, leading to decreased efficiency and competitiveness. Furthermore, a higher average age of long-lived assets may signal a need for increased capital expenditure to upgrade or replace aging infrastructure. This can impact the company’s profitability, competitiveness, and ability to meet evolving market demands.

Personal Ethical Response

In evaluating the issue of genetic engineering, my personal ethical response aligns with a balanced approach that considers both potential benefits and ethical concerns. While acknowledging the potential advancements in fields such as medicine and agriculture, it is essential to prioritize responsible decision-making, transparency, and long-term consequences. Ensuring informed consent, protecting human dignity, and promoting equitable access to benefits are key ethical considerations in genetic engineering.

Conclusion

Evaluating company performance requires a comprehensive analysis that considers various comparisons, such as trend analysis, peer group comparison, and cross-sectional analysis. While fundamental analysis plays a crucial role, it has limitations, such as its focus on financial metrics and reliance on historical data. Considering different industries, specific ratios become more or less relevant, depending on their operational characteristics. Indicators of inventory management strength include inventory turnover and days sales of inventory. A higher average age of long-lived assets can pose challenges related to maintenance costs, technological obsolescence, and capital expenditure. In forming a personal ethical response, a balanced approach that prioritizes responsible decision-making and considers long-term consequences is crucial in addressing complex issues.