You have just graduated from a University in a MBA program and have secured a po
ID: 2423599 • Letter: Y
Question
You have just graduated from a University in a MBA program and have secured a position as a fund manager for a well known investment banking house. You have been given $300 million to manage/invest. The fund is a pension/retirement fund so its perspective is long term with moderate risk of loss of capital and a required return of 9% per annum. In order to reduce the investment risk you are instructed to make 12 investments of $25 million dollars each. Your first assignment is to determine if the fund you are managing should invest $25 million dollars in the stock of the company you have selected for your first analysis/investment decision. Your decision to invest or not invest will be supported by the research paper and a 12 to15 minute presentation to the Executive Committee of the Fund.
The company I have selected is Polaris Industries (PII).
Your analysis, based on the concepts , will address each of the following:
1. Accounting Analysis: Do the accounting practices adopted by the company generally reflect an accurate picture of the economic performance of the company? Did your research find any public announcements of restatement of earnings or other financial statements that would indicate that the financial statements may be of dubious value? This can be done by reviewing the company's 8K filings with the SEC (a mandatory requirement for this paper). These filings can generally be found on the company's website under Investor Relations - SEC filings.
Use thi link to find the 8K form to do the accounting analysis:
http://d1lge852tjjqow.cloudfront.net/CIK-0000931015%20/2399f983-43f9-4899-a0af-a7f5530399c5.pdf
2. Financial Analysis: Analyze financial ratios and cash flow measures of the company relative to its historical performance. Do a 2 year look back (2014-2015) of historical data should be sufficient and required. You must use at least 10 of the ratios including all four of the profitability ratios.
Explanation / Answer
Before investing in shares of any company, I will mull over the two options described below:
In addition to these two measures, i would also consider measuring the firm's profitability because only then i can think of earning the good return. Therefore, an important measure to be considered is ROE.
ROE is a good measure of profitability since it measures returns relative to the amount of money shareholders have invested in the firm. In addition, since shareholder wealth maximization is a firm’s primary goal, it makes more sense to look at this measure.
1.accounting analysis: Yes, accounting practices adopted by the company reflects an accurate picture of its economic performance. As it specifies each and every value and since it has also international links, therefore i didn't find any thing of dubious value. It has earned good margin and is operating well, therefore if there would be anything of fake, it might have got caught in these last years.
2. Finanacial analysis: only 2 year lookback is not sufficeint beacuse it would only indicate the temporary trend the company would be maintaining,if you want to measure any firm's financial performance or need any important information, then minimum 5 years lookback should be considered. Therefore, i would be taking the last 5 years ratio from 2009 to 2014
Gross margin ratio: If we look at the gross margin ratio of the comany of some last years i.e. from 2009 to 2014 we will find that it is hovering in 20s and continuously increasing which is a good sign and the latest ratio is 29.4%
Operating margin ratio: It had a slight decrese in the begining but thereon it started increasing has maintained that trend. It has reached to 16%.
Profitability
Margins % of Sales
TTM
2014-12
2013-12
2012-12
2011-12
2010-12
2009-12
2008-12
2007-12
2006-12
2005-12
Revenue
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
COGS
71.44
70.55
70.32
71.17
72.13
73.37
74.89
77.12
77.92
78.31
77.65
Gross Margin
28.56
29.45
29.68
28.83
27.87
26.63
25.11
22.88
22.08
21.69
22.35
SG&A
11.00
11.56
11.91
11.01
11.63
12.12
11.64
10.61
10.60
9.93
9.28
R&D
3.32
3.31
3.69
3.97
3.98
4.27
4.02
3.98
4.13
4.46
3.64
Other
-1.45
-1.38
-1.22
—
-0.91
-0.85
-1.09
-1.09
-2.54
-2.84
-2.07
Operating Margin
15.69
15.95
15.30
13.85
13.17
11.09
10.54
9.38
9.89
10.15
11.49
Net Int Inc & Other
-0.61
-0.34
-0.09
1.10
-0.12
-0.11
-0.88
-0.29
-0.32
-0.26
-0.33
EBT Margin
15.08
15.61
15.21
14.95
13.05
10.98
9.65
9.09
9.57
9.89
11.16
Profitability
TTM
2014-12
2013-12
2012-12
2011-12
2010-12
2009-12
2008-12
2007-12
2006-12
2005-12
Tax Rate %
34.87
35.08
33.66
34.91
34.35
32.67
33.18
33.70
33.90
31.13
30.84
Net Margin %
9.82
10.14
9.99
9.73
8.57
7.39
6.45
6.03
6.27
6.46
7.66
Asset Turnover (Average)
2.26
2.38
2.38
2.36
2.32
2.18
2.07
2.56
2.30
2.14
2.39
Return on Assets %
22.23
24.15
23.79
23.01
19.88
16.12
13.34
15.44
14.42
13.82
18.35
Financial Leverage (Average)
2.46
2.41
3.15
2.15
2.46
2.86
3.73
5.48
4.45
4.65
2.08
Return on Equity %
54.55
65.01
61.54
52.46
52.25
51.13
59.15
75.74
65.61
39.84
39.18
Return on Invested Capital %
42.31
48.29
47.06
41.86
39.07
27.70
27.99
34.86
30.78
28.25
38.19
Interest Coverage
65.65
63.22
93.50
81.89
87.94
82.55
37.77
19.41
—
—
—
Financial health
Balance Sheet Items (in %)
Latest Qtr
2014-12
2013-12
2012-12
2011-12
2010-12
2009-12
2008-12
2007-12
2006-12
2005-12
Cash & Short-Term Investments
9.75
6.63
5.47
28.05
26.49
37.11
18.36
3.61
8.22
2.51
2.56
Accounts Receivable
8.06
10.00
11.77
9.12
11.40
8.41
11.84
13.73
10.77
8.19
10.19
Inventory
29.20
27.26
24.80
23.21
24.27
22.22
23.48
29.60
28.36
29.60
26.27
Other Current Assets
8.03
8.95
9.32
8.09
9.39
8.38
10.68
12.12
10.79
10.15
9.62
Total Current Assets
55.04
52.85
51.36
68.47
71.55
76.12
64.36
59.06
58.13
50.46
48.64
Net PP&E
25.45
26.77
27.01
17.04
17.41
17.33
25.46
28.71
26.54
26.19
28.91
Intangibles
10.05
10.79
13.63
7.21
—
2.95
3.39
3.29
3.44
3.23
3.28
Other Long-Term Assets
9.46
9.59
8.00
7.27
11.04
3.60
6.79
8.95
11.88
20.12
19.17
Total Assets
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
Accounts Payable
16.50
16.55
14.12
11.37
11.95
10.67
9.91
15.44
11.70
12.93
12.62
Short-Term Debt
—
—
—
—
—
9.42
—
—
—
—
—
Taxes Payable
1.48
0.55
0.55
0.33
0.05
0.25
0.88
0.45
—
—
—
Accrued Liabilities
21.18
23.78
29.52
30.55
25.12
22.52
20.04
22.12
37.81
32.42
34.30
Other Short-Term Liabilities
0.21
0.12
0.19
0.19
13.00
12.17
14.10
15.89
0.92
1.07
1.93
Total Current Liabilities
39.38
41.00
44.38
42.45
50.12
55.03
44.93
53.90
50.43
46.41
48.85
Long-Term Debt
11.98
9.64
16.64
6.73
8.14
9.42
26.19
26.63
25.98
32.10
2.34
Other Long-Term Liabilities
8.06
7.85
7.20
4.37
1.01
0.61
2.10
1.24
1.12
—
0.74
Total Liabilities
59.42
58.49
68.22
53.55
59.28
65.06
73.22
81.76
77.53
78.51
51.93
Total Stockholders' Equity
40.58
41.51
31.78
46.45
40.72
34.94
26.78
18.24
22.47
21.49
48.07
Total Liabilities & Equity
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
Liquidity/Financial Health
Latest Qtr
2014-12
2013-12
2012-12
2011-12
2010-12
2009-12
2008-12
2007-12
2006-12
2005-12
Current Ratio
1.40
1.29
1.16
1.61
1.43
1.38
1.43
1.10
1.15
1.09
1.00
Quick Ratio
0.45
0.41
0.39
0.88
0.76
0.83
0.67
0.32
0.38
0.23
0.26
Financial Leverage
2.46
2.41
3.15
2.15
2.46
2.86
3.73
5.48
4.45
4.65
2.08
Debt/Equity
0.33
0.26
0.53
0.15
0.21
0.27
0.98
1.46
1.16
1.49
0.05
Cash flow measures
Cash Flow Ratios
TTM
2014-12
2013-12
2012-12
2011-12
2010-12
2009-12
2008-12
2007-12
2006-12
2005-12
Operating Cash Flow Growth % YOY
—
7.52
18.30
37.54
1.65
54.05
9.93
-16.37
44.32
-9.85
—
Free Cash Flow Growth % YOY
—
34.61
-23.06
43.56
-9.86
62.06
50.50
-32.26
57.45
29.58
—
Cap Ex as a % of Sales
4.25
4.58
6.66
3.21
3.18
2.80
2.81
3.93
3.58
3.18
4.80
Free Cash Flow/Sales %
8.29
7.24
6.38
9.75
8.21
12.15
9.53
5.09
8.23
5.61
3.84
Free Cash Flow/Net Income
0.84
0.71
0.64
1.00
0.96
1.64
1.48
0.84
1.31
0.87
0.50
Margins % of Sales
TTM
2014-12
2013-12
2012-12
2011-12
2010-12
2009-12
2008-12
2007-12
2006-12
2005-12
Revenue
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
100.00
COGS
71.44
70.55
70.32
71.17
72.13
73.37
74.89
77.12
77.92
78.31
77.65
Gross Margin
28.56
29.45
29.68
28.83
27.87
26.63
25.11
22.88
22.08
21.69
22.35
SG&A
11.00
11.56
11.91
11.01
11.63
12.12
11.64
10.61
10.60
9.93
9.28
R&D
3.32
3.31
3.69
3.97
3.98
4.27
4.02
3.98
4.13
4.46
3.64
Other
-1.45
-1.38
-1.22
—
-0.91
-0.85
-1.09
-1.09
-2.54
-2.84
-2.07
Operating Margin
15.69
15.95
15.30
13.85
13.17
11.09
10.54
9.38
9.89
10.15
11.49
Net Int Inc & Other
-0.61
-0.34
-0.09
1.10
-0.12
-0.11
-0.88
-0.29
-0.32
-0.26
-0.33
EBT Margin
15.08
15.61
15.21
14.95
13.05
10.98
9.65
9.09
9.57
9.89
11.16
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