Financial Analysis The following financial results are shown for East, Inc. and West, Inc. Ratios East, Inc. West, Inc. Current ratio 2.3 2.6 Acid test ratio 1.2 1.4 Accounts receivable turnover 8.4 times 8.8 times Inventory turnover 4.7 times 5.1 times Days sales in inventory 64 days 59 days Days sales uncollected 34.2 days 29.7 days Profit margin ratio 3.2% 2.8% Total asset turnover 1.1 .9 Return on common stockholder’ equity 4.6% 4.1% Price earnings ratio 18.3 28.8 Dividend yield .89% .90 Debt ratio .62 .68 Times interest earned 2.6 times 2.2 times From the above financial data, prepare two separate memos. In the first memo, determine which of the two companies would be the better short-term credit risk and explain why. In the second memo, determine which of the two companies the better investment is and explain why. Your explanations must mention the exact ratios and numbers compared to support your choice. Memo #1: The company I selected as the better short-term credit risk is:________________________ Provide explanation Memo #2: The company I selected as the better investment is:_____________________________ Provide explanation Make sure you use the actual ratios and numbers in your analysis. For example, Company A has a current ratio of 2.1 as compared to Company B of 1.8. Helpful Hints: Choose the appropriate ratios to make each type of decision. Look at the examples in your text and homework. Do not define each ratio. Assume the reader understands the implication of the ratio. Compare the ratios of each company and mention the actual numbers in your analysis. The reader should not have to refer to the data in the schedule.
Financial Analysis
The following financial results are shown for East, Inc. and West, Inc.
|
Ratios |
East, Inc. |
West, Inc. |
|
|
2.3 |
2.6 |
|
Acid test ratio |
1.2 |
1.4 |
|
Accounts receivable turnover |
8.4 times |
8.8 times |
|
Inventory turnover |
4.7 times |
5.1 times |
|
Days sales in inventory |
64 days |
59 days |
|
Days sales uncollected |
34.2 days |
29.7 days |
|
Profit margin ratio |
3.2% |
2.8% |
|
Total asset turnover |
1.1 |
.9 |
|
Return on common stockholder’ equity |
4.6% |
4.1% |
|
Price earnings ratio |
18.3 |
28.8 |
|
Dividend yield |
.89% |
.90 |
|
Debt ratio |
.62 |
.68 |
|
Times interest earned |
2.6 times |
2.2 times |
From the above financial data, prepare two separate memos. In the first memo, determine which of the two companies would be the better short-term credit risk and explain why. In the second memo, determine which of the two companies the better investment is and explain why. Your explanations must mention the exact ratios and numbers compared to support your choice.
Memo #1: The company I selected as the better short-term credit risk is:________________________
Provide explanation
Memo #2: The company I selected as the better investment is:_____________________________
Provide explanation
Make sure you use the actual ratios and numbers in your analysis. For example, Company A has a current ratio of 2.1 as compared to Company B of 1.8.
Helpful Hints:
Choose the appropriate ratios to make each type of decision. Look at the examples in your text and homework.
Do not define each ratio. Assume the reader understands the implication of the ratio.
Compare the ratios of each company and mention the actual numbers in your analysis. The reader should not have to refer to the data in the schedule.
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