BUSN7036 Financial Statement Analysis - Company
Analysis Report
Assessment Weighting: 50% of total marks available for course
Due Date: 11am Monday 15 May (Canberra Time)
Submission Details 1) Upload an electronic copy of the main body (including
appendices) of your assignment with appendices to Wattle via
the ‘Turnitin’ assignment link
AND
2) Email a copy of the spreadsheet models (i.e. the Excel files)
used in making your calculations to mark.wilson@anu.edu.au
Please attach the following cover sheet to your assignment.
http://rsa.dev-box.com.au/sites/default/files/2020-04/rsa-
assessment-cover-sheet-individual-docx.docx
Word Limit: There is no formal word limit, but there are no prizes for
writing the longest assignment. You must communicate
efficiently and effectively.
THIS IS AN INDIVIDUAL ASSIGNMENT:
This assignment must be completed individually. DO NOT SHARE YOUR MATERIAL
WITH OTHER STUDENTS REGARDLESS OF WHETHER THOSE STUDENTS ARE
PRESENTLY ENROLLED IN YOUR CLASS. DO NOT USE artificial intelligence engines
to help your complete this assignment. It is ok to discuss the assignment requirements with
other students, but this cannot include the sharing of text, spreadsheet models or other
materials submitted in your assignment. Email the convenor with any queries that you have
regarding the assignment requirements. He will attempt to answer such queries within 24
hours, and will periodically compile a list of FAQs with responses and upload the FAQ
document to Wattle.
THIS IS NOT AN ASSIGNMENT THAT YOU CAN HOPE TO SUCCESSFULLY
COMPLETE IF YOU LEAVE IT UNTIL THE LAST WEEK. EXTENSIONS WILL
NOT BE GRANTED ON THE BASIS OF COMPETING ASSESSMENT
DEADLINES.
REQUIREMENTS:
Write a report examining the performance and financial position of Downer EDI Ltd. (ASX
Ticker Code = ‘DOW’), a large Australian listed company, for the purpose of advising a
client who is considering purchasing shares in that company. Your report should include (at
least) the following sections:
Business and Strategic Analysis, including:
• an analysis of the impact of economy-wide and industry-wide factors upon Downer
EDI Ltd.’s current and expected future performance. You should also identify DOW’s
closest two competitors (whose financial reports are available on DatAnalysis) and
analyse the extent of similarity between the competitors and DOW. It is not always
possible to identify competitors that are in the exact line of business as the company
you are analysing. Sometimes using the ‘segment reporting’ section of firm’s annual
reports helps to identify parts of companies’ operations that are similar. The ‘segment
reports’ will also help you identify the different business areas in which Downer EDI
Ltd. operates.
• an analysis of the impact of Downer EDI Ltd.’s competitive and corporate strategy
upon its current and expected future performance. When responding to these
requirements, be sure to define competitive strategy and corporate strategy as per
Topic 2 of this course.
• Make sure that your discussion is clearly and directly applied to Downer EDI Ltd, and
to the state of the economy and relevant industries today. Do not simply describe
general nature of alternate approaches to strategy. Show your understanding of how
they apply to Downer EDI Ltd., using evidence from sources that is specific to this
firm and relevant to understanding their current and future operations, and current
evidence of economic and industry-wide conditions.
Accounting Analysis, including:
• an analysis of Downer EDI Ltd.’s accounting policies and discretionary accounting
decisions relevant to the evaluation of current and expected future performance. Focus
your analysis of policies that have the greatest potential to influence your assessment
of the firm’s performance and position (e.g. policies that affect assets that comprise a
large proportion of DOW’s balance sheet are going to be more important than policies
that affect assets that DOW holds low balanced of). Simply transcribing DOW’s
stated policies is NOT analysis. You should also attempt to identify any ‘red flags’
that may suggest a greater than normal likelihood that accounts may be deliberately or
accidentally misstated.
• a comparison of Downer EDI Ltd.’s key accounting policies with those of one of the
competing firms identified in your strategy analysis above. Again, focus on policies
that have a material impact on DOW’s performance and position.
• Sets of re-cast financial statements for Downer EDI Ltd. and for your chosen
competitor firm, for each of the last 5 years. If complete annual reports for your
competitor firm are not available for the full 5 years, you should attempt to
supplement this data with that from alternate sources (e.g. segment reports of other
listed entities). These statements should improve comparability across these firms,
and facilitate the projection of future performance (required later in this assignment).
You should show the 2022 recast statements for DOWcor and your chosen competitor
in the main text of your report (formatted in a manner that makes it easy to read and
compare the firms). The full 5-year re-cast statements should be placed in appendix
attached to the end of the main text.
• Sets of lease-adjusted re-cast financial statements for Downer EDI Ltd. and for your
chosen competitor firm for 2019 only. In these statements non-cancellable operating
leases should brought ‘onto the balance sheet’ and their impact on profit also
accounted for (see Lectures 3a and 4). Show the lease-adjusted re-cast statements for
2019 alongside the equivalent figures without lease-adjustment in the main text of
your assignment (the underpinning calculations should go in an appendix). Clearly
identify and discuss the impact of the accounting treatment of leases on EBITDA,
EBIT, Net Profit, cash flow measures and the Balance Sheet.
Financial Analysis, including:
• an estimation and analysis of ratios relevant to assessing the profitability, liquidity,
leverage, and asset management of Downer EDI Ltd., and the competing firm
discussed in the Accounting Analysis section. When analysing leverage and asset
turnover ratios show the lease-adjusted ratios for 2019 as well, and discuss the impact
of accounting treatment of leases on these measures.
• a time-series analysis of these ratios for both Downer EDI Ltd. and its competitor
over the past 5-years. Presenting graphs of the time-series behaviour of key ratios
would be a very good idea.
• a discussion and analysis of Downer EDI Ltd.’s overall financial position and
profitability.
• You may find each company’s segment reports (see notes to accounts) useful when
analysing companies’ relative performance.
• DO NOT USE THE RATIOS THAT HAVE ALREADY BEEN CALCULATED
AND PUBLISHED ON DATANALYSIS (OR ELSEWHERE).
• The majority of the marks earned in this section will be for your demonstrated ability
to use the information provided by the various ratios to understand Downer’s
operations and the factors that have impacted them in the past and present. If ratios
change over time, try to explain why, with reference to information specific to
Downer. Simply regurgitating comments that could be written about any firm will not
earn many marks. Don’t just say ‘This ratio shows that Downer is more profitable
than company X’. Discuss (with evidence where possible) why this may be the case?
Show that you have invested time and effort in understanding Downer’s operations,
strategy and accounting choices and how they have affected the financial ratios that
you have estimated.
Prospective Analysis, including:
• Specific forecasts for all financial statement items (applying a level of detail similar to
that provided in Lecture 7) extending to at least 5 years in the future and forecasts of
the behaviour of these forecasting items after the end of the specific forecasting
period. Supporting calculations and assumptions must be clearly explained, and
assumptions should be consistent with earlier parts of the assignment (particularly the
‘strategic analysis’ and ‘financial analysis’ sections). This is very important and has
often been overlooked by students in past semesters. HINT: Historic information in
firms segment reports is often useful for refining your forecasts of firms’ overall
growth and profitability.
• a valuation of the Downer EDI Ltd.’s equity, using EITHER: the discounted free cash
flow to equity method OR the abnormal earnings method described in Chapters 7 and
8 of your textbook (DO NOT USE MORE THAN ONE METHOD). In addition to
the earnings and cash flow measures forecast above, valuation will require the
estimation of the firm’s cost of equity capital. It is acceptable (but not mandatory) to
use the Capital Asset Pricing Model to estimate this. Company Betas are available on
DatAnalysis Premium. Estimates of the Market Risk Premium currently applying in
Australia are available from a number of internet-based sources. You should explain
and justify the method chosen to estimate the cost of equity.
• a sensitivity and scenario analysis*, demonstrating the effect on your valuation(s) of
varying the key assumptions underpinning your valuation. For example, the impact of
variations in future sales growth, gross margins, other cost ratios and cost of equity
should be investigated and analysed. This analysis should be informed by sound
economic logic and, where possible, uncertainties identified in your earlier analysis.
For example, if you decide to test the impact of sales growth being a lot higher than
your baseline forecast, you need to explain (or speculate upon) the economic
circumstances that might cause this high growth to occur. Don’t just pick a number
out of thin air and say ‘I wonder would happen if profit margins were 200%?’
*Sensitivity analysis refers to examinations of the impact of varying individual
forecasting assumptions, whereas scenario analysis refers to attempts model
circumstances where multiple forecasting assumptions are affected.
Investment Recommendation
• Drawing upon the analysis above, advise your client on the suitability of the company
for equity investment. You should clearly explain the key assumptions that you have
in your analysis, and the extent to which your recommendation relies on the validity
of those assumptions. It may help to make assumptions regarding your client’s
tolerance for risk and their likely investment horizon, and to state these assumptions
clearly in your report. There is no ‘right’ or ‘wrong’ recommendation. What is
important is that you present a sound justification for your recommendation, based on
a logical discussion of the analysis presented in the earlier sections.
What to put in the main text and what to put in appendices?
In your main text, try to avoid ‘bogging down’ your report with lengthy detailed
computations. Use the main text to identify the key information that is required to understand
your analysis (e.g. definitions of key ratios, tables/graphs summarising the computed ratios
over time), and put details of your calculations in Appendices. Each Appendix should be
clearly numbered, and it should be easy for the reader to find the appropriate Appendix
should they need more detail on a calculation presented in the main text.
Within your Appendices you should detail the method by which all calculations are made,
and assumptions underpinning calculations, the precise source of the data used in
calculations. For example, if you present a ratio of debt to equity in your main text, your
Appendices must clearly disclose:
• the formulae applied,
• the specific financial statement items used in the calculation,
• the values of those financial statement items, and
Please note that you are expected to calculate ratios yourself and not rely on ratios already
computed on DatAnalysis Premium or any other website. It will be very obvious to the
marker if you have simply copied ratios from another source. Failure to follow this
instruction may significantly affect your grade for this assignment.
IMPORTANT
It is a requirement of this assignment that you keep an electronic copy of all documents /
spreadsheets used in your assignment including any supporting material not submitted with
your assignment. You may be required to submit these files directly to the Course Convenor
if there is doubt regarding the originality of any part of your report, or to try to better
understand how you have made your calculations. Do not destroy the electronic copy of your
assignment until the final grades for this course have been confirmed. You may be asked to
attend a 15 minute oral examination designed to test your understanding of your written
assessment submission.
REFERENCING
Your report must be original and properly referenced in accordance with the requirements of
the University’s Academic Misconduct Rules:
• Please use the Harvard (author-date) system
• You must clearly identify whether material that you are referencing is a direct quote
from the source (place in quotation marks) or a paraphrasing of the source
• As you will frequently be referring to financial statement data in this assignment, it is
acceptable to make a single initial acknowledgement (via footnote) of the source(s) of
that data. However, any text drawn from or based on discussion in Downer EDI Ltd.’s
annual reports should be properly referenced.
• You cannot use ANY MATERIAL prepared by any other current or former student,
or Artificial Intelligence engine.
• You cannot ‘re-cycle’ material that you have submitted for assessment in another
assignment in any course.
• You cannot simply copy and paste material from your own submission of Assignment
1 in this course. However, obviously some similarities between your submissions are
inevitable.
• If you have any doubt regarding referencing requirements contact the Course
Convenor.
• Further details are available at : http://www.anu.edu.au/students/learning-
development/academic-integrity and
https://www.legislation.gov.au/Details/F2021L00997