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The information below is excerpted from the financial statements of two companie

ID: 418331 • Letter: T

Question

The information below is excerpted from the financial statements of two companies. Use this information to answer the questions

(in $ million)

Company A

Company B

Net revenues

117958

41296

Net income

3526

1188

Total current assets

18672.5

29564.5

Total assets

42494

37433

Total current liabilities

12708.5

15370

Total liabilities

24671

32030

Total stockholders’ equity

17823

5403.5

Footnote: Approximately 98% of Company B’s account receivables are from unpaid balances carried by customers using the store credit card

1. Is one company significantly more profitable than the other? Justify using appropriate ratio(s).

2. Which company creates higher value for its shareholders? Explain using appropriate ratio(s). (Stockholder equity can be used as a proxy for shareholders)

(in $ million)

Company A

Company B

Net revenues

117958

41296

Net income

3526

1188

Total current assets

18672.5

29564.5

Total assets

42494

37433

Total current liabilities

12708.5

15370

Total liabilities

24671

32030

Total stockholders’ equity

17823

5403.5

Explanation / Answer

Solution:

1. Calculating Profit Margin for both the companies:

Profit Margin = Net Income/Net revenue

For Company A: Profit Margin = 3526/117958 = 2.98%

For Company B: Profit Margin = 1188/41296 = 2.87%

As profit margin for Company A > Profit Margin of company B, Company A is more profitable.

2) Calculating Return on Shareholder's equity for both the companies:

Return on Shareholder's equity = Net Income/Shareholder's equity

For Company A, Return on Shareholder's equity = 3526/17823 = 19.78%

For Company B, Return on Shareholder's equity = 1188/5403.5 = 21.98%

As Return on Shareholder's equity for company B is more than that of company A. So, Company B creates higher value for its shareholders.