Data Analytics – Excel Exercise –
This is a data analytics exercise modified from the one presented in your textbook. We will be using
Excel to perform an analysis of two companies: GPS Corporation and Tru, Inc.
Please download the Excel spreadsheet “GPS_Tru_Financials.xls” from the Data Analytics Module on
Canvas.
Part 1: For each of the two companies in the most recent five-year period 2017-2021 calculate and display the trends for the:
(a) Debt to equity ratio
(b) Rate of return on assets
(c) Rate of return on shareholders’ equity
Please make sure to label the charts correctly . These charts
will be used to answer the next part and will be submitted as supporting material.
Part 2: Based on what you find, answer the following questions:
1. Which of the two companies finances a higher percentage of its assets by borrowed funds relative to funds invested by shareholders as measure by the debt to equity ratio in 2021?
2. Which of the two companies indicates a higher profitability during the period 2017-2021 without regard to the sources of financing as measured by the return on assets ratio?
3. Which of the two companies indicates a higher effectiveness of employing resources provided by owners during the period 2017-2021 as measured by the return on shareholders’ equity ratio?
4. Management is using its borrowed funds to enhance the earnings for shareholders of (a) GPS Corporation, (b) Tru, Inc., (c) both firms, or (d) neither firm during the period 2017-2021?
Background Information
• What does the debt to equity (D/E) ratio tell us? The firm’s capital structure refers to the amount of debt and equity the company uses to finance its operations. D/E ratio is oftentimes used as a measure of risk. All else equal, the higher the D/E ratio, the higher the risk. The risk referred to here is “default risk” because it indicates the likelihood the company will default on its obligations .
However, debt can also create “favorable financial leverage”. If the company can earn a return on the borrowed funds in excess of the cost of borrowing the funds, then shareholders are provided with a total return greater than what could have been earned with equity funding alone. Examining additional ratios will help determine whether the company has a favorable financial leverage.
