Question

Please take a look below at the two companies' financial ratios. Use the material your learned in the chapter to try and identify the industries these two companies operate in. You are going to be graded on the quality of your analysis and arguments (e.g. this ratio indicates that... and that ratio indicates the other,... and taken together these ratios indicate that.... (and so forth)) :

Company A	Company B
P/E Ratio: 30 Price/Sales: 6 Price/Book Value of Equity: 7.5 Profit Margin: 20% Operating Margin: 25% Return on Assets (ROA): 6% Return On Equity (ROE): 25% Current Ratio: 3	P/E Ratio:   17 Price/Sales: 0.6 Price/Book Value of Equity: 3 Profit Margin: 3% Operating Margin: 5% Return on Assets (ROA): 7% Return On Equity (ROE): 15% Current Ratio: 1

Answer 1

P/E Ratio- This ratio tells the relationship between price pr share and earning per share of the company. Company A has higher P/E than company B, it indicates that company A's share price is costlier than company B's share price.

Price/Sales- This ratio compares the company's stock price to its revenue numbers. Company A's ratio is greater than company B's ratio, it indicates that company B is undervalued.

Profit margin- This ratio is the measure of profitability of the company. Company A's margin is 20% and company B's margin is 3%, it clearly indicates that company A is more profitable than company B.

Operating margin- This ratio tells the profitability of the company, operating profit is also called EBIT. Company A's operating margin is higher than company B's operating margin.

ROA- This ratio tells how well assets are being utilized and are they able to generate profit for the company or not. Company A's ROA is 1% less than company B's ROA.

ROE- This ratio tells the return that shareholders get on their investment in the company. Company A's ROE is higher than company B's ROE that clearly indicates that company A provides higher return to shareholders than company B.

Current Ratio- This ratio is the relationship between current assets and current liabilities. Company A's current ratio is higher than company B's current ratio that indicates, company A is highly liquid than company B.