Question

Look up the latest financial statements for two public companies within the same industry of your choice and calculate the following ratios for the latest year:

Return on capital.

Return on equity.

Operating profit margin.

Days in inventory.

Debt ratio.

Times-interest-earned.

Current ratio.

Quick ratio.

Summarize the information revealed in your ratio analysis. Additionally, analyze the financial ratios and compare the two companies’ performances against one another. From the ratios, can you determine which company performed better financially?

find two financial public companies of your choice and calculate the following ratios for the latest year:

Return on capital.

Return on equity.

Operating profit margin.

Days in inventory.

Debt ratio.

Times-interest-earned.

Current ratio.

Quick ratio.

Summarize the information revealed in your ratio analysis. Additionally, analyze the financial ratios and compare the two companies’ performances against one another. From the ratios, can you determine which company performed better financially?

Answer 1

Since choosing the two public companies depends on the student (you) and also I want the student (you) to get a hands on feel of how to calculate the ratios, I will guide you completely in how to calculate all the ratios. The only thing that you need to do is just identify two public listed companies and get hold of their annual reports. Rest of the work is explained below

For all the ratios, just identify the Balance Sheet (B/S) and Profit and Loss (P&L) statement of the two companies in their 2018 annual report.

1. Return on Capital = EBIT/ Average of (Total assets of 2018 and 2017 - Current Liabilities of 2018 and 2017)
EBIT is operating profit available in P&L. Total assets and Current Liabilities are available on the B/S. Whenever we are calculating any ratio which is a combination of P&L and B/S, all B/S figures should be taken as average figures

Higher the better

2. Return on Equity = PAT/Average of (Total Equity of 2018 and 2017)
PAT is profit after tax and is available in P&L statements. Total Equity is available on the B/S.

Higher the better

3.Operating Profit Margin = Operating Profit (EBIT)/Total Revenue
Both EBIT and Total Revenue are available on P&L statements

Higher the better

4. Days in Inventory = (Average of (Inventory in 2018 and 2017)/Cost of Goods sold)*365
Inventory information is available in current assets break-up of B/S. Cost of goods sold is available in P&L

Lower the days inventory,  better for the company

5. Debt Ratio = (Long-term debt + Short-term debt + Current maturities of long-term debt)/Total Equity
Long-term debt, Short-term debt and Current maturities of long-term debt are available in long term liabilities and short term liabilities section of B/S. Total equity is available on the equity section of B/S

Lower the better

6. Times Interest Ratio = EBIT/Interest
Both EBIT and Interest are available on the P&L. Times Interest ratio shows how many times the company has the ability to meet its interest with its current earnings (EBIT)

Higher the better

7. Current Ratio = Current Assets/Current Liabilities
Both the variables are available in the B/S

Higher the better

8. Quick Ratio = (Current Assets - Inventory - Pre-paid Expenses)/Total Liabilities
Inventory and Pre-paid expenses are available in the current assets break-up of B/S

Higher the better