Summary information from the financial statements of two companies competing in the same industry follows.
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Loud Company
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Clear Company
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Loud Company
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Clear Company
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Data from the current year end balance sheets |
Data from the current year’s income statement |
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Assets |
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Sales |
$395,600 |
$669,500 |
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Cash |
$ 22,000 |
$ 38,500 |
Cost of goods sold |
292,600 |
482,000 |
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Accounts receivable, net |
79,100 |
72,500 |
Interest expense |
7,900 |
12,400 |
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Current notes receivable (trade)
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13,600 |
11,000 |
Income tax expense |
7,700 |
14,300 |
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Merchandise inventory |
88,800 |
84,000 |
Net income |
35,850 |
63,700 |
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Prepaid expenses |
11,700 |
12,100 |
Basic earnings per share |
1.33 |
2.23 |
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Plant assets, net |
178,900 |
254,300 |
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Total assets |
$394,100 |
$472,400 |
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Beginning of year balance sheet data |
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Liabilities and Equity |
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Accounts receivable, net |
$ 74,200 |
$ 75,300 |
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Current liabilities |
$ 92,500 |
$ 99,000 |
Current notes receivable (trade) |
0 |
0 |
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Long term notes payable |
95,000 |
95,300 |
Merchandise inventory |
107,100 |
82,500 |
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Common stock, $5 par value |
135,000 |
143,000 |
Total assets |
385,400 |
445,000 |
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Retained earnings |
71,600 |
135,100 |
Common stock, $5 par value |
135,000 |
143,000 |
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Total liabilities and equity |
$394,100 |
$472,400 |
Retained earnings |
51,100 |
111,700 |
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Required
1. For both companies compute the (a) current ratio, (b) acid test ratio, (c) accounts (including notes) receivable turnover, (d) inventory turnover, (e) days’ sales in inventory, and ( f ) days’ sales uncollected.
Identify the company you consider to be the better short term credit risk and explain why.
2. For both companies compute the (a) profit margin ratio, (b) total asset turnover, (c) return on total assets, and (d) return on common stockholders’ equity. Assuming that each company paid cash dividends of $3.00 per share and each company’s stock can be purchased at $25 per share, compute their (e) price earnings ratios and ( f ) dividend yields. Identify which company’s stock you would recommend as the better investment and explain why.