Comprehensive Ratio Analysis of two Companies

P10. Lucy Lee is considering an investment in the common stock of a chain of retail department stores. She has narrowed her choice to two retail companies, Lucent Cor- poration and Ranbaxy Corporation, whose income statements and balance sheets follow.

 

Income Statements

 

✔ 2b: Lucent asset turnover: 2.5 times                                                                                                                                                                                                                                                                   

✔ 3a: Lucent debt to equity ratio: 1.0 time

✔ 4b: Lucent cash flow to sales: 2.2%

✔ 5a: Lucent price/earnings ratio: 13.9 times

Balance Sheets

 

Accounts payable                                                          $  1,376,000                      $  2,290,400

Notes payable                                                                      600,000                          1,600,000

Income taxes payable                                                         200,800                             293,600

Bonds payable                                                                  8,000,000                           8,000,000

Common stock, $20 par value                                         4,000,000                           2,400,000

Additional paid-in capital                                                2,439,200                         14,274,400

Retained earnings                                                             3,332,800                                                                                        8,448,000 Total liabilities and stockholders’ equity                                                     $19,948,800                                                                                        $37,306,400

During the year, Lucent paid a total of $200,000 in dividends. The market price per share of its stock is currently $120. In comparison, Ranbaxy paid a total of $456,000 in dividends, and the current market price of its stock is $152 per share. Lucent had net cash flows from operations of $1,086,000 and net capital expenditures of $2,500,000. Ranbaxy had net cash flows from operations of $1,970,000 and net capital expenditures of $4,200,000. Information for prior years is not readily available. Assume that all notes payable are current liabilities and all bonds payable are long-term liabilities and that there is no change in inventory.

ReQUIReD

Conduct a comprehensive ratio analysis for each company, following the steps below. Compare the results. (Round to one decimal place, and consider changes of 0.1 or less to be indeterminate.)

1.    Prepare an operating asset management analysis by calculating for each company the (a) current ratio, (b) quick ratio, (c) receivables turnover, (d) days’ sales uncol- lected, (e) inventory turnover, (f) days’ inventory on hand, (g) payables turnover,

(h) days’ payable, and (i) financing period.

2.    Prepare a profitability and total asset management analysis by calculating for each company the (a) profit margin, (b) asset turnover, and (c) return on assets.

3.    Prepare a financial risk analysis by calculating for each company the (a) debt to equity ratio, (b) return on equity, and (c) interest coverage ratio.

4.    Prepare a liquidity analysis by calculating for each company the (a) cash flow yield,

(b)   cash flows to sales, (c) cash flows to assets, and (d) free cash flow.

5.    Prepare an analysis of market strength by calculating for each company the (a) price/earnings (P/E) ratio and (b) dividend yield.

6.    aCCoUntinG ConneCtion ▶ Compare the two companies by inserting the ratio calculations from 1 through 5 in a table with the following column headings: Ratio Name, Lucent, Ranbaxy, and Company with More Favorable Ratio. Indicate in the last column which company had the more favorable ratio in each case.

7.    BUSineSS appliCation ▶ How could the analysis be improved if  information about these companies’ prior years were available?

 

 

Chapter 14: Financial Statement

effect of Alternative Accounting Methods

P11. BUSineSS appliCation ▶ Minnows Corporation began operations in 2014. At the beginning of the year, the company purchased plant assets of $1,800,000, with an estimated useful life of 10 years and no residual value. During the year, the company had net sales of $2,600,000, salaries expense of $400,000, and other expenses of $160,000, excluding depreciation. In addition, Minnows purchased inventory as follows.

At the end of the year, a physical inventory disclosed 1,000 units still on hand. Minnows’s managers know they have a choice of accounting methods, but they are unsure how those methods will affect net income. They have heard of the FIFO and LIFO inventory methods and the straight-line and double-declining-balance depreciation methods.

ReQUIReD

1.    Prepare two income statements for Minnows, one using the FIFO and straight- line methods and the other using the LIFO and double-declining-balance methods. Ignore income taxes.

2.    Prepare a schedule accounting for the difference in the two net income figures obtained in requirement 1.

3.    What effect does the choice of accounting method have on Minnows’s inventory turnover? What conclusions can you draw? Use the year-end balance to compute the ratio. (Round to one decimal place.)

4.    How does the choice of accounting methods affect Minnows’s return on assets? Assume the company’s only assets are cash of $160,000, inventory, and plant assets. Use year-end balances to compute the ratios. Is your evaluation of Minnows’s profit- ability affected by the choice of accounting methods? (Round to one decimal place.)

 

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Status NEW Posted 25 May 2017 10:05 AM My Price 12.00

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