Question

ATC 8-4 Business Applications Case Performing ratio analysis using real-world data

American Greetings Corporation manufactures and sells greeting cards and related items such as gift wrapping paper. CSX Corporation is one of the largest railway networks in the nation. The following data were taken from one of the companies’ February 29, 2016, annual report and from the other’s December 30, 2016, annual report. Revealing which data relate to which company was intentionally omitted. For one company, the dollar amounts are in thousands, while for the other they are in millions.

	Company 1	Company 2
Sales	$1,900,790	$11,069
Depreciation costs	50,303	1,301
Net earnings	129,842	1,714
Current assets	559,868	2,487
Property, plant, and equipment	467,710	31,150
Total assets	1,603,449	35,414

Required

a. Calculate depreciation costs as a percentage of sales for each company.

b. Calculate property, plant, and equipment as a percentage of total assets for each company.

c. Based on the information now available to you, decide which data relate to which company. Explain the rationale for your decision.

d. Which company appears to be using its assets most efficiently? Explain your answer.

Answer 1

Based on the information available , we can summarize the data as follows :-

Particulars	Company 1	Company 2
Sales	1,900,790	11,069
Depreciation	50,303	1,301
Net earnings	129,842	1,714
Current assets	559,868	2,487
Property, plant & equipment	467,710	31,150
Total assets	1,603,449	35,414
Depreciation as % of Sales	2.65%	11.75%
Property plant equipment as a % of total assets	29.17%	87.96%
Return on Assets	8.10%	4.84%

a.) The depreciation as a % of sales in calculated by the following formula

(Depreciation costs/Sales)

It is 2.65% for Company 1 and 11.75% for Company 2

b.) The property plant and equipment as a percentage of total assets for each company is calculated as follows :-

(Property,Plant and equipment/Total assets)

It is 29.17% for Company 1 and 87.96% for Company 2

c.) Based on the information available, we understand the following :-

* Company 1 - American Greetings Corporation

* Company 2 - CSX Corporation.

The following are the reasons for the conclusion :-

i.) Higher Percentage of Property Plant Equipment to Total assets:-

The Company 2 (CSX Corporation) , as mentioned in the questions is the country's largest railway network. Being the largest railway network, it is expected that the assets of the company would primarily relate to assets(rails, equipment, etc). This company has around 87% of assets (Property, plant and equipment) as a percentage of total assets. The other company has a meagre 29% of property plant and equipment as a percentage of total sales which would mostly relate to Company 1(American Greetings Corporation) as they would comparatively have lesser property plant and equipment as part of their assets.

ii.) Higher percentage of Depreciation to Total sales

Higher the fixed assets like property plant and equipment, higher the depreciation expenses involved as a percentage of sales. Similarly, higher the usage of the asset will ultimately lead to higher depreciation. This can be verified by the fact for Company 2(CSX corporation), being the largest railway network within the country and the amount of turnover involved on a day to day basis, would involve higher rates and amounts of depreciation because its assets are constantly put to use and the company would also have an increased concentration of Property planty and equipment in its business.

iii.) Turnover:-

The turnover of company 2(mentioned in millions, CSX corporation) is greater than the turnover of company 1 and being the country's largest railway network, it is reasonable that CSX corporation has such a high turnover.

d.) Return on Assets:-

The return on assets ratio explains the percentage of profit that the company earns in relation to the overall resources deployed. We observed that the Return on Assets ratio of 8.10% for Company 1(American greeting corporation) is greater than that of CSX corporation which has a ratio of 4.84%.

Formula = Net earnings/Total Assets

As such, the American greeting corporation is using its asset more efficiently.