You have just graduated from a University in a MBA program and have secured a po

Question

You have just graduated from a University in a MBA program and have secured a position as a fund manager for a well known investment banking house. You have been given $300 million to manage/invest. The fund is a pension/retirement fund so its perspective is long term with moderate risk of loss of capital and a required return of 9% per annum. In order to reduce the investment risk you are instructed to make 12 investments of $25 million dollars each. Your first assignment is to determine if the fund you are managing should invest $25 million dollars in the stock of the company you have selected for your first analysis/investment decision. Your decision to invest or not invest will be supported by the research paper and a 12 to15 minute presentation to the Executive Committee of the Fund.

The company I have selected is Polaris Industries (PII).

Your analysis, based on the concepts , will address each of the following:

1. Accounting Analysis: Do the accounting practices adopted by the company generally reflect an accurate picture of the economic performance of the company? Did your research find any public announcements of restatement of earnings or other financial statements that would indicate that the financial statements may be of dubious value? This can be done by reviewing the company's 8K filings with the SEC (a mandatory requirement for this paper). These filings can generally be found on the company's website under Investor Relations - SEC filings.

2. Financial Analysis: Analyze financial ratios and cash flow measures of the company relative to its historical performance. Do a 2 year look back of historical data should be sufficient and required. You must use at least 10 of the ratios including all four of the profitability ratios.

Explanation / Answer

Financial Analysis

The cash flow statement of the past 2 years of the Polaris industries shows net increase in cash and cash equivalents.

2015- $17,749(in thousands)

2014- $45,352(in thousands)

There is a decrease in cash and cash equivalents from 2014 to 2015.

The amount of cash and cash equivalents a company holds is very important and is a large component of a company's overall operating strategy. For instance, companies with high amounts of cash and cash equivalents are better able to get through hard times when sales are low or expenses are particularly high. High cash reserves can also signal that the company is "saving up" to make some significant acquisition.

However, companies with a lot of cash on hand are often takeover targets because their excess cash essentially helps buyers finance their purchase. High cash reserves can also indicate that management has not figured out how to best deploy the cash.

It is important to note that there is an opportunity cost to holding cash; that cost is the return onequity that company could have earned by investing the cash in a new product or expanding business.

Many theories exist about how much cash certain kinds of companies should hold. The current ratioand the quick ratio help investors and analysts compare company cash levels in relation to certain expenses.

Financial Ratios

The following is the financial ratio analysis for the year 2014 and 2013;

Particulars 2014 2013

Liquidity Ratios

Current Ratio 129% 116%

Quick Ratio 62% 60%

Cash Ratio 16% 12%   

Profitability Ratios

Gross Margin 29% 30%

Operating Margin 16% 15%

Pre-Tax Margin 16% 15%

Profit Margin 10% 10%

Pre-Tax ROE 81% 107%

After Tax ROE 53% 70%

The profitability ratio shows the decreasing trend from 2013 to 2014 which is a concern .The after tax ROE decreases from 70% to 53% which is not a healthy sign.

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