Financial Analysis
The following financial results are shown for East, Inc. and West, Inc.
Ratios
East, Inc.
West, Inc.
Current ratio
2.3
2.6
Acid test ratio
1.2
1.4
Accounts receivable turnover
8.4 times
8.8 times
Inventory turnover
4.7 times
5.1 times
Days sales in inventory
64 days
59 days
Days sales uncollected
34.2 days
29.7 days
Profit margin ratio
3.2%
2.8%
Total asset turnover
1.1
.9
Return on common stockholder’ equity
4.6%
4.1%
Price earnings ratio
18.3
28.8
Dividend yield
.89%
.90
Debt ratio
.62
.68
Times interest earned
2.6 times
2.2 times
From the above financial data, prepare two separate memos. In the first memo, determine which of the two companies would be the better short-term credit risk and explain why. In the second memo, determine which of the two companies the better investment is and explain why. Your explanations must mention the exact ratios and numbers compared to support your choice.
Memo #1: The company I selected as the better short-term credit risk is:________________________
Provide explanation
Memo #2: The company I selected as the better investment is:_____________________________
Provide explanation
Make sure you use the actual ratios and numbers in your analysis. For example, Company A has a current ratio of 2.1 as compared to Company B of 1.8.
Helpful Hints:
Choose the appropriate ratios to make each type of decision. Look at the examples in your text and homework.
Do not define each ratio. Assume the reader understands the implication of the ratio.
Compare the ratios of each company and mention the actual numbers in your analysis. The reader should not have to refer to the data in the schedule.
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