Describe three to five industry average ratios and explain how a company’s management might use the information.
The following ratios are selected
- Current Ratio
- Net Margin ratio
- Debt Ratio
- Return on Equity
- Fixed Asset Turnover Ratio
The company management use industry average ratio to compare against it own ratios to determine how the company is performing relative to market and tries to determine its strength and weakness so that it can improve further.
What factors might limit the effectiveness of using ratio analysis?
You have the opportunity to invest $10,000 in one of two companies that are part of the same industry. The only information you have about the companies is presented below. Assume that high means in the top third of the industry, average means in the middle third and low is in the bottom third. Based on this information, which company would you select? Explain you selection.
Ratio Company A Company B
ROA Average High
Profit Margin Low High
Financial Leverage Low High
Current ratio High Low
Price/Earnings Average High
Debt-to-Equity Low High
Below are current year financial statements for two companies in the same industries and direct competitors. Both companies have been in operation approximately the same length of time.
|Company A||Company B|
|Accounts receivable (net)||29,000||24,000|
|Property and equipment, net||125,000||394,000|
|Long-term debt (5% interest)||62,000||58,000|
|Capital stock ($5 par)||145,000||505,000|
|Contributed capital in excess of par||18,000||103,000|
|Total liabilities and stockholders’ equity||351,000||761,000|
|Sales revenue (1/3 of sales on credit)||452,000||799,000|
|Cost of goods sold||(250,000)||(396,000)|
|Expenses (including interest and taxes)||(161,000)||(308,000)|
|Selected data from prior year|
|Accounts receivable (net)||16,000||33,000|
|Property and equipment, net||110,000||375,000|
|Market price per share at end of current year||$16||$13|
|Average income tax rate||25%||25%|
|Dividends declared and paid in current year||22,000||88,000|
1) Prepare a schedule reflecting a ratio analysis of each company. Compute all ratios from the module for which you have enough data.
2) If an investor were considering an investment in one of these companies, which would you recommend based on this data? Explain your response.
Below are ratios for two companies which operate in the same industry.
|Company A||Company B|
|Gross profit margin||59.1||66.2|
|Return on equity||29.0||26.9|
|Return on assets||16.8||28.2|
Evaluate the companies as a potential investment based on the given ratios.
4) The multiple step income statement discloses three subtotals of profit before reporting net income. Those three intermediate profit figures are:
Gross profit, income from discontinued operations, and income from operations.
Gross profit, income from operations, and income before taxes.
Gross profit, gain or loss from an extraordinary item, and income before taxes.
Gross profit, income or loss from discontinued operations, and income from operations.
5. Carolina Company computed the following ratios for a two year period:(refer to image) Required: Comment on the trend of each of the ratios from 2009 to 2010. State concerns or possible implications for the future of each.