1. Why is ratio analysis a useful tool for a financial analyst? What are some li

Question

1. Why is ratio analysis a useful tool for a financial analyst? What are some limitations or weaknesses of using ratios?

2. Explain why an analyst should always focus on after-tax cash flows (rather than pre-tax cash flows) when analyzing a potential investment.

3. What do we mean when we accuse a firm of “managing” their earnings? Why would firms do this? What are some examples of things management can do to “manage” their earnings? Should we be concerned when a firm does this (i.e. why would we care)?

4. Look up the most recent 10-k filed by Dave & Buster’s (symbol PLAY) in the Edgar database. Use it to answer the following questions. • As of March 28th, 2018, how many shares of common stock were outstanding? • What are three of the risk factors that the company lists in the filing for investors to consider? • As of February 4th, 2018, how many employees worked in the company’s corporate headquarters? • How many operating stores did the company have in Texas as of February 4th, 2018? • What was the cost of food and beverages for the company for the fiscal year ended February 4 th, 2018? • Who is the company’s auditor?

5. Look up Pitney Bowes (symbol: PBI) financial statements using Yahoo Finance and answer the following questions. Where you need to do a calculation, show your work – don’t just give the final answer. As definitions for some financial ratios can differ between different sources and books, use our text’s definition of the relevant ratios in completing your work. • What were the gross margins, operating margins, and net margins for the company for each of the past three years (2015, 2016, 2017)? Give your answers as percentages. • What was the company’s current ratio at the end of 2017? • What was the total amount of dividends the company paid out over the past three years? • What was the company’s cash coverage ratio at the end of 2017? • What was the return on assets for each of the past three years? • What was the percentage growth in the company’s revenue between 2016 and 2017? • Print a stock price chart comparing the company’s performance over the past year with the S&P 500 as well as one of the stocks you selected for your portfolio in class (i.e. print one chart with all three on the same graph). Which was the best performing investment over that time? Attach the chart to your other answers when you turn in your Problem Set.

Explanation / Answer

1.
Advantages of financial ratio analysis are:
1. Absolute numbers are hard to analyze in between two different companies, creating ratio out of some absolute figures helps in comparing.
2. The trends in ratios (whether the firm is consistent) are also a great measure to analyze the different firms.
3. Ratios highlight the important information in a simpler manner very quickly which is very hard to see in the absolute figures.
Disadvantages of financial ratio analysis are:
1. Sometimes, comparing firms from different industries, different environment/demography/history can be misleading because of the way the company carries out its financial functions.
2. Ratio analysis just explains the past of the firm but users are more interested in the future.
3. Some ratios are not directionally good or bad. Sometimes a "sweet spot" is to find out which is very hard while analyzing ratios.

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