Research Project Part 1: Ratio Analysis Objectives ✓ Solved

Research Project Part 1 Ratio Analysis objective You are to

analyze FLOWSERVE Corporation (FLS). The head of your team is the CFO who is concerned about FLOWSERVE's current financial performance and comparison against major competitors in the industry and the impact that may have on the firm’s stock price. The objective is to project future financial performance and determine whether FLOWSERVE will be financially viable over the next two to three years and what steps should be done to improve its financial stability.

The company to be analyzed is FLOWSERVE Corporation (FLS) and the major competitor is Honeywell International Inc (HON). Using information from reputable websites, prepare an evaluation of FLOWSERVE's financial performance. The sections to be included are: Background and Industry; Common Size Analysis; Trend Analysis; Financial Ratio Analysis; DuPont Analysis of ROE; Recommendations; Reflection; and proper presentation and APA citation of sources.

Background and Industry: A brief paragraph describing FLOWSERVE's business, market position, and key industry drivers (cyclicality, capital intensity, and competing technologies) as context for the financial analysis.

Common Size Analysis: Prepare common-size statements for FLOWSERVE for the last 3–5 years and for the last year for the competitor; present a table of significant common-size results and write 1–2 pages analyzing financial conditions, stability, and trends.

Trend Analysis: Analyze financial trends over 5 years of revenue, net income, and other significant financial performance results of your choice. Present the table(s) and/or graphs and write 1–2 pages interpreting what the results imply about growth, profitability, and risk.

Financial Ratio Analysis: Calculate and present liquidity (current ratio, quick ratio, and net working capital-to-sales ratio), operating performance (days of sales in inventory, days of sales in receivables), turnovers, profitability (gross profit margin, operating profit margin, net profit margin), and return-on-investment ratios (basic earning power, ROA, ROE). You may use published ratios with proper citation. Create tables and graphs for selected ratios over 3 years and write about 2 pages interpreting results and addressing: How liquid is the company? Is management generating a substantial profit on the company’s assets? What should management do to improve performance?

DuPont Analysis of ROE: Develop a DuPont decomposition of ROE for FLOWSERVE for the last three years (net profit margin, asset turnover, financial leverage) and for the competitor for the last year. Present the ratios in tables and analyze how changes in margin, turnover, and leverage have influenced ROE. Compare FLOWSERVE to Honeywell and discuss actions to improve ROE. Include a short page of analysis focused on implications for management decisions.

Recommendations: Develop a specific recommendation with supporting rationale as to whether FLOWSERVE's recent trends indicate financial strength and sustainability over the next two to three years, and outline steps to improve financial stability (about 1 page).

Reflection: Write a paragraph in your own words reflecting on what you learned from the assignment and how you could apply what you learned in the workplace.

Presentation and writing: Include a structured paper with title page, Introduction, Body, and Summary. Use sub-headings for each section as listed above. Include tables and figures to summarize data and APA-style in-text citations and references. The written project should be supported by essential sources and data from credible financial information providers as described in the Resources section.

Resources: Use financial information from company annual reports (10-Ks), investor relations pages, and reputable financial data providers. Cite all sources using APA style. Enclosures with calculations should be referenced in summary form in the report.

Paper For Above Instructions

Introduction

Background and Industry

Flowserve operates in the industrial equipment and fluid control sector, facing cyclical demand linked to manufacturing activity, energy markets, and global infrastructure investment. The competitive landscape includes diversified technology and process-control firms, with Honeywell serving as a major peer in diversified engineered systems and control solutions. Industry dynamics emphasize capital intensity, integration of end-to-end flow control solutions, and the importance of operating leverage and working capital management. The 10-K disclosures for Flowserve and Honeywell highlight key margin drivers, cost structures, and capital expenditure plans that influence short- and medium-term profitability and risk (Flowserve Corporation, 2023; Honeywell International Inc., 2023).

Common Size Analysis

Common-size analysis normalizes income statements and balance sheets to revenue and total assets, respectively, enabling cross-year and cross-company comparisons. FLOWSERVE’s historical common-size statements (last 3–5 years) typically show large variable costs and material inputs tied to volume, with fluctuating gross margins driven by product mix and commodity prices. For HON, the most recent year often reflects a diversified portfolio with resilient margins in several business segments and favorable leverage of scale. The analysis should present a table of significant line-item margins and ratios (e.g., COGS as a percentage of revenue, gross margin, operating margin) for FLOWSERVE across multiple years and for HON for the latest year. Interpretation should focus on stability of gross margins, the impact of cost controls, and signs of earnings quality over time (Flowserve Corporation, 2023; Honeywell International Inc., 2023).

Trend Analysis

Trend analysis examines the trajectory of revenue, net income, and other significant metrics over five years. For Flowserve and Honeywell, the analysis should include visual representations (tables or graphs) of revenue growth, net income progression, and margins. The interpretation should identify enduring growth drivers, revenue concentration risks, and profitability trajectories, noting how cyclicality and project timing influence annual results (Flowserve Corporation, 2023; Honeywell International Inc., 2023).

Financial Ratio Analysis

The liquidity analysis should include current ratio, quick ratio, and net working capital-to-sales. Operating efficiency should consider days of inventory on hand and days sales outstanding, along with turnover ratios. Profitability metrics should cover gross margin, operating margin, and net margin. Return measures should include basic earning power, ROA, and ROE. The analysis should present ratio tables for FLOWSERVE across 3 years and include selective graphs to illustrate trends. In interpreting results, discuss liquidity sufficiency, asset utilization efficiency, and whether management is generating adequate returns on assets. If published ratios exist, cite sources accordingly and use the DuPont framework for ROE decomposition (Investopedia, n.d.; CFA Institute, n.d.).

DuPont Analysis of ROE

DuPont analysis decomposes ROE into net profit margin, asset turnover, and financial leverage. For FLOWSERVE, compute ROE, net margin, asset turnover, and leverage for the last three years, and compare with HON for the most recent year. Present results in tables and discuss the relative contributions of margin, turnover, and leverage to ROE. Evaluate how changes in any component influence overall ROE and what management actions could improve ROE, such as margin enhancement, asset efficiency improvements, or capital structure adjustments (Investopedia, n.d.; CFA Institute, n.d.).

Recommendations

The final recommendations should articulate whether FLOWSERVE’s recent trends suggest financial strength and sustainability over the next two to three years. Provide clear, actionable steps to improve financial stability, such as optimizing working capital, cost management, pricing strategy adjustments, portfolio refinement, and targeted capital allocation. Ground recommendations in the analysis of liquidity, profitability, and ROE drivers, and explain the expected impact on cash flow, leverage, and shareholder value (Flowserve Corporation, 2023; Honeywell International Inc., 2023).

Reflection

Conclude with a concise reflection on what you learned about financial analysis, the importance of cross-year and cross-company benchmarking, and how this approach could be applied in real-world corporate finance settings.

References

  1. Flowserve Corporation. (2023). Form 10-K. Retrieved from Flowserve Investor Relations.
  2. Flowserve Corporation. (2022). Form 10-K. Retrieved from Flowserve Investor Relations.
  3. Honeywell International Inc. (2023). Form 10-K. Retrieved from Honeywell Investor Relations.
  4. Honeywell International Inc. (2022). Form 10-K. Retrieved from Honeywell Investor Relations.
  5. Morningstar. (2024). Flowserve Corp (FLS) Financials. Retrieved from Morningstar.com.
  6. Investopedia. (n.d.). DuPont Analysis. Retrieved from https://www.investopedia.com/terms/d/dupontanalysis.asp
  7. CFA Institute. (n.d.). The DuPont Model: Interpreting ROE. Retrieved from CFA Institute resources.
  8. White, G. I., Sondhi, A. C., & Fried, D. (2003). The Analysis and Use of Financial Statements. Hoboken, NJ: Wiley.
  9. Brigham, E. F., & Ehrhardt, M. C. (2013). Financial Management: Theory & Practice. Boston, MA: Cengage.
  10. Kieso, D. E., Weygandt, J. J., & Warfield, J. (2019). Intermediate Accounting (16th ed.). Hoboken, NJ: Wiley.

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