Chapter 12, Problem 41BP

Calculating various ratios for analysis (Learning Objectives 2 & 3) 20-25 min.

Assume you are purchasing an investment and decide to invest in a company in the home remodeling business. You narrow the choice to Skyview, Inc., or Vista Corp. You assemble the following data. Assume all sales are on credit.

Selected income statement data for the current year:

	Skyview, Inc..	Vista, Corp.
Net Sales…………..	$421,000	$400,000
Cost of Goods Sold .	238,000	202,000
EBIT.......................	177, 000	162,000 15,000
interest Expense.....	13,000
Net Income…………	119,000	106,000

Selected balance sheet and market price data at the end of the current year

	Skyview, Inc..	Vista, Corp.
Current Assets: Cash......................	$13,000	$ 27,000
Short-Term Investments………………	40,000	29,000
Accounts Receivable, Net……………..	48,000	34,000
Inventory………………………………	131,000	136,000
Prepaid Expenses...................................	8,500	10,003
Total Current Assets……………………	240,500	236,000
Total Assets……………………………	359,000	355,000
Total Current Liabilities…………………	57,000	70,000
Total Liabilities......................	185,000	200,000
Common Stock $1.00 Par, 11,000 Shares…		11,000
$2.00 Par, 10,000 Shares…	20,000
Total Stockholder’s Equity……………….	174,000	165,000
Market price per share of common stock…..	$ 58	$ 50

Selected balance sheet data at the beginning of the current year

	Skyview, Inc..	Vista, Corp.
Accounts Receivable, Net……………..	$39,000	$51,000
Inventory………………………………	135,000	128,000
Total Assets...........................................................	288,000	353,000
Common Stock $1.00 Par, 11,000 Shares……………		11,000
$2.00 Par, 10,000 Shares…	20,000
Total Stockholder’s Equity……………………….	157,000	154,000

Your investment strategy is to purchase the stock of the company that has a low price-earnings ratio but seems to be in good shape financially. Assume that you analyzed all other factors and your decision depends on the results of the ratio analysis to be performed.

Requirement

1 Compute the following ratios for both companies for the current year and decide which company’s stock belt fits your investment strategy.

1. a. Quick ratio
2. b. Debt ratio
3. c. interest coverage ratio
4. d. Accounts receivable turnover
5. e. Inventory turnover
6. f. Total asset turnover
7. g. Return on assets
8. h. Return on equity
9. i. Earnings per share
10. j. Price-earnings ratio