Comprehensive Ratio Analysis of two Companies
P4. Mel Filbert is considering an investment in the common stock of a chain of retail department stores. She has narrowed her choice to two retail companies, Single Cor- poration and Design Corporation, whose income statements and balance sheets follow.
Income Statements
? 2b: Single asset turnover: 2.5 times
?
3a: Single debt to equity ratio: 1.0 time
? 4b: Single cash flow to sales: 2.2%
? 5a: Single price/earnings ratio: 13.9 times
Balance Sheets Assets
Single Design
(Continued)
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Chapter Assignments 699
Liabilities and Stockholders' equity
? 1: Net income using FIFO and straight line: $190,800
? 1: Net income using LIFO and
double-declining-balance: $93,200
|
Accounts payable
|
$ 344,000
|
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$ 572,600
|
|
Notes payable
|
150,000
|
|
400,000
|
|
Income taxes payable
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50,200
|
|
73,400
|
|
Bonds payable
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2,000,000
|
|
2,000,000
|
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Common stock, $20 par value
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1,000,000
|
|
600,000
|
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Additional paid-in capital
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609,800
|
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3,568,600
|
|
Retained earnings
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833,200
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2,112,000
|
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Total liabilities and stockholders' equity
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$4,987,200
|
|
$9,326,600
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During the year, Single paid a total of $50,000 in dividends. The market price per share of its stock is currently $60. In comparison, Design paid a total of $114,000 in dividends, and the current market price of its stock is $76 per share. Single had net cash flows from operations of $271,500 and net capital expenditures of $625,000. Design had net cash flows from operations of $492,500 and net capital expenditures of $1,050,000. 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, using the available informa- tion. 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, Single, Design, 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?