Question

The 2019 financial statements for Company A and Company B are provided below:The companies are in the same line of business and are direct competitors in India. Both have been in business approximately 10 years, and each has had steady growth. The management of each has a different viewpoint in many respects. Company B is more conservative, and as its president said, “We avoid what we consider to be undue risk.” Neither company is publicly held. Company A has an annual audit by a Chartered Accountant firm but Company B does not.

1. Compute the ratio analysis of each company and try to include all the ratios you can.

2.A client of yours has the opportunity to buy 10% of the shares in one or the other company at the per share prices given and has decided to invest in one of the companies. Based on the data given, prepare a comparative written evaluation of the ratio analysis and give your recommended choice with the supporting explanation.

Particulars	Company A		Company B
Balance Sheet
Cash	₹	41,000	₹	21,000
Accounts receivable (net)	₹	38,000	₹	31,000
Inventory	₹	99,000	₹	40,000
Operational assets (net)	₹	1,40,000	₹	4,01,000
Other assets	₹	84,000	₹	3,05,000
Total Assets	₹	4,02,000	₹	7,98,000
Current liabilities	₹	99,000	₹	49,000
Long term debt (10%)	₹	65,000	₹	60,000
Capital stock (par Rs. 10)	₹	1,48,000	₹	5,12,000
Contributed capital in excess of part	₹	29,000	₹	1,06,000
Retained earnings	₹	61,000	₹	71,000
Total liabilities and stockholders equity	₹	4,02,000	₹	7,98,000
Income Statement
Sales Revenue (1/3 on credit)	₹	4,47,000	₹	8,02,000
Cost of goods sold	₹	-2,41,000	₹	-3,98,000
Expenses (including interest and income tax)	₹	-1,61,000	₹	-3,11,000
Net Income	₹	45,000	₹	93,000
Selected data for 2018 statements
Accounts receivable (net)	₹	18,000	₹	38,000
Inventory	₹	94,000	₹	44,000
Long-term debt	₹	60,000	₹	48,000
Other data
Per share price at the end of 2019 (offering price)	₹	17	₹	15
Average income tax rate	30%		30%
Dividends declared and paid in 2019	₹	33,000	₹	1,48,000

Answer 1

Ratio Analysis
		Company	Workings
Ratio	Formula	A	B
Return Ratios
1.Return On Assets	Net Income/Total Assets	0.11	0.12
2.Return on equity	Net Income/Shareholders Equity	0.19	0.13	Shareholders Equity	238000	689000
Sharehoder ratios
1.Earning per share	Net income for sharehoders/Number of share outstanding	3.04	1.82
2.Dividends per share	Dividends paid to shareholders/Number of shares outstanding	2.23	2.89
3.Price earning ratio	Market price per share/Earnings per share	5.59	8.26
4.Dividend payout ratio	Dividends/Earnings	0.73	1.59
Liquidity
1.Current ratio	Current asset/Current liabilitie	1.80	1.88	Current Asset	178000	92000
2.Quick ratio	(Current assets-Inventory)/Current liabilities	0.80	1.06	Current Liabilities	99000	49000
3.Net Working capital to sales	(Current asset-Current liabilitie)/Sales	0.18	0.05	Credit sales	149000	267333.3
Profitability
Net profit margin	Net Income/Sales	0.10	0.12
Financial levarage
Total Debt to Assets	Total debt/Total Assets	0.41	0.14	Total debt	164000	109000
Long term debt to asset	Long term debt/total assets	0.16	0.08	Total Assets	402000	798000
Total debt to equity	Total debt/Total shareholders equity	0.69	0.16	Total shareholders equity	238000	689000
Equity Multiplier	Total Assets/sharehoders equity	1.69	1.16	Eanings before interest and tax	70785.71	138857.1
Time interest coverage	Earnings before interest and taxes/Interest	10.89	23.14	Interest	6500	6000
Activity
Inventory turnover	Cost of Goods sold/Inventory	2.43	9.95
Accounts receivable turnover	Sales on credit/Accounts receivable	3.92	8.62
Total Assets Turnover	Sales/Total Assets	1.11	1.01
Fixed assets turnover	Sales/Fixed Assets	3.19	2.00
Operating cycle
Number of days of inventory	Inventory/(cost of goods sold/365)	149.94	36.68
Number of days of receivables	Accounts receivable/(Sales on credit/365)	93.09	42.33

Written Analysis
	A	B
No. of shares	1480	5120
Share price(1 Nos)	17	15
Investment value(10%)	25160	76800
Return(EPS*No. of shares)	4500	9300
Return on Equity(% Value)	17.89	12.11	(Return/Investment value)*100
By analysing the above ratios and analysis its recommended to invest in company A. and Since the audit of company A is done by a chartered accountant it is assumed that the financila statements gives a true and fair view and its final, where as the audit is still pending for company B there is a chance of changes may comes to the reported values of the Company B.