Question

You are analyzing two companies that manufacture electronic toys - Like Games Inc. and Our Play Inc. Like Games was launched eight years ago, whereas Our Play is a relatively new company that has been in operation for only the past two years. However, both companies have an equal market share with sales of $400,000 each. You've collected company data to compare Like Games and Our Play. Last year, the average sales for all industry competitors was $1,020,000. As an analyst, you want to make comments on the expected performance of these two companies in the coming year. You've collected data from the companies' financial statements. This information is listed as follows:

	Like Games	Our Play	Industry Average
Accounts Receivable	10,800	15,600	15,400
Net Fixed Assets	220,000	320,000	867,000
Total Assets	380,000	500,000	938,400

Using this information, complete the following statements to include in your analysis.

1. Our play has _________ days of sales tied up in receivables, which is much _________ than the industry average. It takes Our Play _______ time to collect cash from its customers than it takes Like Games.

2. Like Games's fixed assets turnover ratio is _________ than that of Our Play. This is because Like Games was formed eight years ago, so that acquistion cost of its fixed assest is recorded at historic values when the company bought its assets and has been depreciated since then. Assuming that fixed assets prices (not book values) rose over the past six years due to inflation, Our Play paid a _________ amount for its fixed assets.

3. The average total assets turnover in the electronic toys industry is 1.09x, which means that 1.09x of sales is being generated with every dollar of investment in assets. A ________ total assets turnover ratio indicates greater efficiency. Both companies' total assets turnover ratios are ________ than the industry average.

Answer 1

Statement 1

Days sales receivables (DSR) = (Account Receivable/Total Credit Sales) * 360

For Like Games, DSR = 10,800/400,000 * 360 = 9.72 days

For Our Play, DSR = 15,600/400,000 * 360 = 14.04 days

For Industry, DSR = 15,400/1,020,000 * 360 = 5.44 days

Our play has 14.04 days of sales tied up in receivables, which is much MORE than the industry average. It takes Our Play MORE time to collect cash from its customers than it takes Like Games.

Statement 2

Fixed Asset Turnover (FAT) = Sales/Total Assets

For Like Games, FAT = 400,000/380,000 = 1.05

For Our Play, FAT = 400,000/500,000 = 0.80

For Industry, FAT = 1,020,000/938,400 = 1.09

Like Games's fixed assets turnover ratio is HIGHER than that of Our Play. This is because Like Games was formed eight years ago, so that acquistion cost of its fixed assest is recorded at historic values when the company bought its assets and has been depreciated since then. Assuming that fixed assets prices (not book values) rose over the past six years due to inflation, Our Play paid a HIGHER amount for its fixed assets. {Inflation, as mentioned has increased the price of fixed asset. Since they were established later, they would have paid lower}

Statement 3

Higher fixed asset turnover implies that more sales are generated per unit of asset. This implies higher efficiency.

The average total assets turnover in the electronic toys industry is 1.09x, which means that 1.09x of sales is being generated with every dollar of investment in assets. A HIGHER total assets turnover ratio indicates greater efficiency. Both companies' total assets turnover ratios are LOWER than the industry average.