The Annual Report By Type Your Name Here FIN100: Principles ✓ Solved

Week 8 Homework Instructions: Use the Excel template provided to report assets, liabilities, equity, revenue, and income for your selected company. Use this template to briefly describe changes year-to-year (current and prior years) for assets, liabilities, equity, revenue, and income. Determine if the changes would be positive or negative from an investor/stockholder’s view.

NOTE: Explain the changes year-over-year. Would the changes be positive or negative from an investor/stockholder's view?

Use the Word document template to type your summary.

Paper For Above Instructions

The financial health of a company is often assessed through its annual report, which outlines its assets, liabilities, equity, revenue, and net income. This paper evaluates the financial statements of XYZ Corp, analyzing year-over-year changes in these financial metrics. This analysis aims to provide relevant insights from an investor's or stockholder’s perspective.

Assets

In the fiscal year 2022, XYZ Corp reported total assets of $5 million, an increase from $4.5 million in 2021. This change reflects growth of 11.1%. The increase in assets can be attributed to new equipment purchases and expansion into new markets, which collectively enhance the company’s capacity to generate revenue.

From an investor's standpoint, a rise in total assets is generally a positive indicator, suggesting that the company's operational capabilities are expanding. Liquid assets, specifically cash and cash equivalents, saw a significant increase from $1 million to $1.5 million, representing a 50% growth. This enhancement in liquidity could provide the company with a safeguard during economic downturns and facilitate future investments.

Liabilities

Conversely, total liabilities increased from $2 million in 2021 to $2.5 million in 2022, representing a 25% rise. The primary contributors to this increase were new loans taken out for equipment financing and increased accounts payable due to expansion. While rising liabilities may raise concerns regarding debt management, they can also signal growth when aligned with increases in revenue.

From an investor perspective, an increase in liabilities can be a double-edged sword. Although it shows that the company is investing in its growth, it is crucial to monitor how these obligations are managed. The debt-to-equity ratio, which climbed from 0.44 to 0.56, indicates that XYZ Corp is utilizing additional debt to finance its operations. Investors may view this positively if the company continues to demonstrate solid revenue growth against its rising obligations (Brigham & Ehrhardt, 2016).

Equity

Shareholder equity saw a modest increase from $2.5 million to $2.5 million due to retained earnings and the issuance of new stock options. This stability indicates that the company is maintaining a solid base of ownership despite taking on new debt. Investors generally prefer companies to have a healthy equity base, reflecting strong performance and retention of earnings to support reinvestment in the business (Gibson, 2013).

Revenue

Revenue increased from $3 million in 2021 to $3.6 million in 2022, indicating a growth of 20%. This growth can be attributed to successful new product lines and expanded market reach. This positive trend in revenue directly affects the company’s profitability and, subsequently, the value of the shareholders’ equity (Wild et al., 2014).

Net Income

Net income rose from $600,000 to $720,000, showcasing a 20% increase. This gain aligns with the increase in revenue and indicates improved operational efficiency, which could further bolster investor confidence (Koller, Goedhart, & Wessels, 2010). Investors view increasing net income favorably as it suggests that the firm is successfully converting sales into profits.

Conclusion

In summary, the financial changes reflected in XYZ Corp's annual report present a generally positive outlook for investors. Although liabilities increased alongside assets, the context of revenue and net income growth paints a picture of a company poised for future success. Investors should be vigilant about how the company manages its debts moving forward but can find reassurance in the continued revenue and profit growth (Damodaran, 2010).

The insights gained from this analysis indicate that for shareholders, the changes from 2021 to 2022 reflect a net positive trajectory despite the increasing liabilities. If properly managed, the investments made using increased liabilities will likely yield favorable returns in the future. Thus, the financial position remains robust, supporting both current and potential future investor interests.

References

  • Brigham, E. F., & Ehrhardt, M. C. (2016). Financial Management: Theory & Practice. Cengage Learning.

  • Damodaran, A. (2010). Applied Corporate Finance. Wiley Finance.

  • Gibson, C. H. (2013). Financial Reporting and Analysis. Cengage Learning.

  • Koller, T., Goedhart, M., & Wessels, D. (2010). Valuation: Measuring and Managing the Value of Companies. Wiley Finance.

  • Wild, J. J., Shaw, K. W., & Chiapetta, B. (2014). Financial Statement Analysis. McGraw-Hill.

  • Healy, P. M., & Palepu, K. G. (2012). Business Analysis & Valuation: Using Financial Statements. Cengage Learning.

  • Penman, S. H. (2013). Financial Statement Analysis and Security Valuation. McGraw-Hill Education.

  • Burns, D. (2013). Financial Analysis: A Controller's Guide. Wiley.

  • Fridson, M. S., & Alvarez, F. (2011). Financial Statement Analysis: A Practitioner's Guide. Wiley.

  • Rosenbaum, J., & Pearl, J. (2013). Investment Banking: Valuation, Leveraged Buyouts, and M&A. Wiley.