This requires an Excel analysis: compute five ratios from information in the Financials tab of the stock quote for a company you own or sold at www.howthemarketworks.com. Compute the current ratio, inventory turnover, debt ratio, return on assets, and price-earnings ratio for the past three years, and explain why trends in those ratios justified buying or selling the company’s stock. Ratio definitions are on pages 92-93 in the textbook. Compute them in an EXCEL file
There are potentially three problems you might encouter with this assignment. First, accountants who prepare finanical statements do not use the exact same terms for essentially the same item. You will need to do the best you can to find terms in your company’s financials that match up to terms in your textbook. Second, if your company is a service company, you are likely to have trouble finding inventory for the inventory turnover ratio. For example, American Express or Disney (two service companies) are not likely to have much if any inventory. So substitute total asset turnover for the inventory turnover ratio, which is more meaningful for those types of companies. In fact, substitute any ratio for another within a ratio class (e.g. quick ratio for current ratio). Just make sure you have one ratio from each of the five classes of ratios: Liquidity; Asset Management; Debt Management; Profitability; and Market Value. Be sure you understand the ratio and what its trend means for your company. Third, you might have trouble loading your Excel spreadsheetUse formulas in your spreadsheets so I know you calculated the ratios.
