I am an investor and I want to get into an industry. Problem is, I cannot decide
ID: 406034 • Letter: I
Question
I am an investor and I want to get into an industry. Problem is, I cannot decide which I’d rather invest in. Utilizing the financial data below analyze and compare the 2 years of data provided. Please use that information to advise me as to which company is in a better position. Do finanical calulations for both companies and show work.
BE DESCRIPTIVE AND SPECIFIC
GRADING SUMMARY:
1 Point for EACH financial ratio (60 Points total)
Working Capital
Current Ratio
Quick Ratio
Debt to Total Assets Ratio
Gross Profit Margin
Return on Total Assets (ROA)
Analysis of financial ratios (25 Points)
Break Even Analysis (15 Points)
Company A
In Millions
FINANCIAL INPUT
2010
2009
Net Income
$528
$555
Total Debt
$6,400
$5,589
Total Assets
$8,859
$8,776
Sales
$5,636
$5,531
Cogs
$2,243
$2,234
Current Assets
$1,309
$1,279
Current Liabilities
$1,338
$854
Inventory
$244
$262
Company B
In Millions
FINANCIAL INPUT
2010
2009
Net Income
$4,313
$3,609
Total Debt
$31,687
$29,383
Total Assets
$69,206
$63,117
Sales
$38,063
$36,149
Cogs
$31,337
$30,452
Current Assets
$12,225
$11,889
Current Liabilities
$11,000
$8,934
Inventory
$1,442
$1,271
Company A
In Millions
FINANCIAL INPUT
2010
2009
Net Income
$528
$555
Total Debt
$6,400
$5,589
Total Assets
$8,859
$8,776
Sales
$5,636
$5,531
Cogs
$2,243
$2,234
Current Assets
$1,309
$1,279
Current Liabilities
$1,338
$854
Inventory
$244
$262
Explanation / Answer
The various ratios are as caluculated below
For Comapny B
The current ratio to assess your company's ability to meet its financial obligations, Company B has better Current ration then Company A. Same is the case with Quick Ration. The quick ratio (also known as the acid-test ratio) is similar to the quick ratio in that it's a measure of how well a company can meet its short-term financial liabilities.
Working Capital of Company B is better than A, It has ample capacity to pay off its current liabilities with current assets. The current ratio is current assets divided by current liabilities and provides insight into working capital health at a firm. A ratio above 1 means current assets exceed liabilities, and the higher the ratio, the better.
Return on Assets
In this term COmpany A is better than B because.ROA talks about how good the company is at using its assets to make money. And for comapny A it is increasing also, from 0.11 to 0.21
So for 1$ spent by Company A generates 0.21 $ compared to 0.11$ of COmpany B spending same amount
Gross Profit Margin
Company A is better than B
A financial metric used to assess a firm's financial health by revealing the proportion of money left over from revenues after accounting for the cost of goods sold. Gross profit margin serves as the source for paying additional expenses and future savings.
Based on all these metrics Company A is better than B and the investor should invest in it because
The ROA is higher and hence returns are good for same amount spent by both the companies
The Gross margin of products sold by Company A is better than B
More importantly the growth in these ratios are higher in A than B
Thought the wroking capital and current/Quick ratios of B is better than A , it could be because A is using it back in business to expand or bring in innovations( visible from better margins in its products) hence, investor should invest in A
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