ASB4406

Financial Analysis

Notes to the Coursework

A. Jaafar
Email: a.jaafar@bangor.ac.uk

Objective:

To prepare a financial analysis report of a listed UK

firm and its competitor listed elsewhere in the context of
their sector of operations.
Methods:
Industry and Firm strategic Analysis
Accounting Quality Analysis
Profitability Analysis using Financial ratio decomposition
approach
(Penman Chapters 7, 9 & 11)
Data source:
Information on firms, financial data and operating
circumstances via the Thomson One Banker database,
relevant news, annual reports, and from the firms
website.

Overview:
Select a UK firm and its competitor listed elsewhere,
and create two portfolios.
Download financial statements (5 years) from Thomson
One Banker
http://banker.thomsonib.com/
Username: sbard@bangor.ac.uk Password: mawrbrawd
Reformulate financial statements
Income statements
Balance sheets (Statement of Financial Position)
Analyse Reformulated Financial Statements
Ratios based on reformulated financial statements
Analysis of profitability (Chapter 11
Common size and trend analysis (Chapter 9)
Interpret the results

Step 1
Select a listed firm domiciled in the UK and its competitor
that is listed elsewhere. For the purpose of this assignment,
exclude financial firms and global firms.
Example:
NEXT Plc (UK) and GAP Inc. (US)
Sector: Consumer Services
Industry Classification: Apparel Retailers
At this stage, in order to understand the nature of the
business, you should examine the firms, i.e., business
description, key financial data, price chart, analyst rating
available via Thomson, as well as going through their annual
reports

In order to analyse the firm in the context of its sector of

operations (i.e., comparing the firm against its industry
average), you should also need to create a portfolio of firms
operating in similar industry.
A portfolio should represent the population of firms
operating in the industry.
Example of portfolios:
UK: NEXT plc, FCUK, Matalan, JJB Sports, Burberry,
Monsoon, etc.
US: GAP Inc., Limited Brand, Nordstorm, SAKS, TJX
Using Thomson One Banker, download financial statements
(i.e., Balance Sheets & Income Statements) for all these
firms.

Step 2:
Reformulate Financial Statements, i.e., Balance Sheet
and Income Statement to distinguish between operating
and financing activities (refer to Penman Ch. 9)
For this assignment, the Reformulated Balance Sheet
and Reformulated Income Statement templates
available on Blackboard to facilitate your work.

Step 3:
Calculate ratios based on reformulated financial statements
Analysis of profitability (Chapter 11)
Inter-firm comparisons
Industry average comparisons
Common size and trend analysis (Chapter 9)

The Analysis of Profitability

ROE Earnings /Average Equity
ROA [FLEV x SPREAD]

FLEV

Level 1

ROA OI/NOA

ROA

Level 2

PM = OI / Sales

Level 3

NFO
SE

Sales PM

Gross Margin Ratio

SPREAD ROA - NBC

NBC

NFE
NFO

ATO = Sales / NOA

Other Items PM

Expense Ratios

Other OI/Sales
Ratios

Individual Asset and

Liability Turnovers

Borrowing Cost
Drivers

Example: NEXT Plc

Ratios

Definition

RNOA

Return on Net Operating Assets (RNOA)

NBC

Net Borrowing Cost (NBC)

PM

Operating profit margin

Net Comprehensive Profit Margin

01/31/04

01/31/03

01/31/02

01/31/01

59.32%

56.89%

53.30%

37.99%

6.98%

-11.54%

4.99%

4.24%

10.36%

9.45%

9.70%

9.69%

9.75%

9.56%

10.14%

10.03%

OLLEV

Operating Liability Leverage

122.72%

127.72%

117.42%

87.72%

FLEV

Financial Liability Leverage (FLEV)

129.36%

-0.71%

-29.74%

-21.30%

52.34%

68.43%

48.31%

33.75%

572.5%

601.9%

549.7%

392.1%

127.97%

57.12%

39.16%

30.96%

SPREAD
ATO

Asset Turnover (ATO)

ROCE

Return on Common Equity

ROE Drivers
ROE is decomposed into drivers over three levels of analysis:
1.

Effects of Leverage

1.

Analysis of Operating Profitability

2.

Asset Utilization

3.

Analysis of Net Borrowing Cost

The Basic Decomposition

Return on Equity
Return on Assets

Financial Leverage Return on Assets Net Borrowing Costs

ROE t ROAt FLEV t ROAt NBCt

Distinguishes operating and financial
profitability and the effects of leverage

NEXT Plc: ROCE Decomposition

RNOA

(FLEV

SPREAD)

ROCE

Check

2003

0.5932

(1.294

0.523)

127.04%

127.97%

2002

0.5689

(-0.007

0.684)

56.41%

57.12%

2001

0.533

(-0.297

0.483)

38.94%

39.16%

2000

0.3799

(-0.213

0.337)

30.80%

30.96%

ROCE
ROCE:
NEXT
vs.
GAP

RNOA

( FLEV

SPREAD)

ROE

ROCE:
NEXT
vs. UK
Firms

RNOA

(FLEV

SPREAD)

REQUIREMENTS:

Report Outline:
1. Background information on the firms and the sector
of operations
2. Analysis of Accounting Quality
3. Profitability Analysis
Financial Ratio Decomposition Approach
4. Results and Discussions
5. Conclusions