Assume you are purchasing an investment and decide to invest in a company in the home remodeling business. You narrow the choice to Build It Right, Inc., or Structurally Sound Corp. You assemble the following selected data:
Selected income statement data for the current year:
Build It Right, Inc. Structurally Sound Corp.
Net sales (all on credit) $298.000 $223,000
Cost of goods sold 155,000 125,000
Income from operations 83,000 47,000
Interest expense 13,000 ------
Net income 43,000 29,000
Selected balance sheet and market price data at the end of the current year:
Build It Right, Inc. Structurally Sound Corp.
Current assets
Cash $12,000 $13,000
Short-term investments 11,000 12,000
Accounts receivable, net 28,000 25,000
Inventory 60,000 52,000
Prepaid expenses 2,000 1,000
Total current assets 113,000 103,000
Total assets 197,000 159,000
Total current liabilities 59,000 65,000
Total liabilities 79,000 65,000
Preferred stock, 5%, $100 par 20,000 -----
Common stock, $1.00 par, 6,000 shares --- 6,000
$2.50 par, 3,000 shares 7,500 -----
Total stockholders' equity 118,000 94,000
Market price per share of common stock $67 $31
Selected balance sheet data at the beginning of the current year:
Build It Right, Inc. Structurally Sound Corp.
Accounts receivable, net $29,000 $24,000
Inventory 53,000 56,000
Total assets 162,000 155,000
Preferred stock, 5%, $100 par 20,000 -----
Common stock, $1.00 par, 6,000 shares ----- 6,000
$2.50 par, 3,000 shares 7,500 ------
Total stockholders' equity 76,000 71,000
Your investment strategy is to purchase the stock of the company that has a low price/earnings ratio but appears to be in good shape financially. Assume that you analyzed all other factors and your decision depends in the results of the ratio analysis to be performed.
Requirements:
1. Compute the following ratios for both companies for the current year, and decide which company's stock better fits your investment strategy.
a. Quick ratio
b. Inventory turnover
c. Days' sales in average receivables
d. Debt ratio
e. Earnings per share of common stock
f. Price/earnings ratio
2. Compute the EVA for each company, assuming a 10% cost of capital. Does the EVA confirm the opinion you formed as a result of the ratio analysis?