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 |
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.
- a. Quick ratio
- b. Debt ratio
- c. interest coverage ratio
- d. Accounts receivable turnover
- e. Inventory turnover
- f. Total asset turnover
- g. Return on assets
- h. Return on equity
- i. Earnings per share
- j. Price-earnings ratio
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