Problem
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
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Company B
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|
Balance Sheet
|
|
|
|
Cash
|
31,000
|
16,000
|
|
Accounts receivable (net)
|
29,000
|
24,000
|
|
Inventory
|
87,000
|
29,000
|
|
Property and equipment, net
|
125,000
|
394,000
|
|
Other assets
|
79,000
|
298,000
|
|
Total assets
|
351,000
|
761,000
|
|
Current liabilities
|
91,000
|
47,000
|
|
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
|
|
Retained earnings
|
35,000
|
48,000
|
|
Total liabilities and stockholders' equity
|
351,000
|
761,000
|
|
Income Statement
|
|
|
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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)
|
|
Net income
|
41,000
|
95,000
|
|
Selected data from prior year
|
|
|
|
Accounts receivable (net)
|
16,000
|
33,000
|
|
Inventory
|
81,000
|
42,000
|
|
Property and equipment, net
|
110,000
|
375,000
|
|
Long-term debt
|
65,000
|
70,000
|
|
Other data
|
|
|
|
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
|
Required:
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.