Question

Please use the following information to answer the next question:

For BB Incorporated:

Cash Flows from Assets -------------------------------------------------------------------- 100 dollars
EBIT (from 1999 INCOME STATEMENT) -------------------------------------------0 dollars
Depreciation Expense (from 1999 INCOME STATEMENT) ---------------------- 0 dollars
Taxes (from 1999 INCOME STATEMENT) ------------------------------------------ 0
Net Fixed Assets from BALANCE SHEET dated December 31, 1998-------------1400 dollars
Net Fixed Assets from BALANCE SHEET dated December 31, 1999------------ 1300 dollars
Additions to (Changes in) NWC for 1999 ---------------------------------------------- 0 dollars

For KK Incorporated:

Cash Flows from Assets ---------------------------------------------------------------------0 dollars
EBIT (from 1999 INCOME STATEMENT) -------------------------------------------500 dollars
Depreciation Expense (from 1999 INCOME STATEMENT) ----------------------100 dollars
Taxes (from 1999 INCOME STATEMENT) ------------------------------------------100
Net Fixed Assets from BALANCE SHEET dated December 31, 1998------------1400 dollars
Net Fixed Assets from BALANCE SHEET dated December 31, 1999------------1800 dollars
Additions to (Changes in) NWC for 1999 ----------------------------------------------0 dollars

For LL Incorporated:

Cash Flows from Assets --------------------------------------------------------------------100 dollars
EBIT (from 1999 INCOME STATEMENT) -------------------------------------------0 dollars
Depreciation Expense (from 1999 INCOME STATEMENT) ----------------------100 dollars
Taxes (from 1999 INCOME STATEMENT) -------------------------------------------0
Net Fixed Assets from BALANCE SHEET dated December 31, 1998-------------1400 dollars
Net Fixed Assets from BALANCE SHEET dated December 31, 1999-------------1300 dollars
Additions to (Changes in) NWC for 1999 -----------------------------------------------0 dollars

*Based only on the numbers provided, which Company is doing the BEST?
*In other words, if you were an individual investor, in which Company would you invest?

Answer 1

Assumption : In absence of specific method mentioned to determine which company doing best or in other words company in which Investment should be made. I have used Balance of EBIT and Net Fixed Assets to draw conclusions regarding above matters.

Answer:

KK Incorporated is doing the Best or in other words individual investors should invest in this company.

Reasons:

1. Highest Earning Before Interest and Taxes ( EBIT ).

Higher Earning Before Interest and Taxes is good indicator to determine level of earning for that particular company. As higher the earnings implies higher return on equity investment for the investors in other words with higher Earning Before Interest and Taxes company is doing best as compared to others.

KK Incorporated has highest Earning Before Interest and Taxes with 500 dollars as compared to BB and LL incorporated with 0 dollars and 0 dollars respectively.

2. Increase in Net Fixed Assets Balance.

Increase in Net Fixed Assets Balance indicates that company is doing best or in other words investor should invest in such company as it has resources to Investment in fixed assets.

Decrease in Net Fixed Assets Balance indicates that company is selling fixed assets either due to generate Cash in hard time or future possibilities of discontinuation. So, decrease in Net Fixed Assets Balance indicates company is not doing best or investor should not invest due to uncertainty regarding future of the company.

KK Incorporated has increase in Net Fixed Assets Balance by 400 dollars as compared to BB Incorporated in which net fixed assets balance is decreased by 100 dollars due to sale of assets and LL incorporated in which net fixed assets balance is decreased by 100 dollars due to sale of assets.

Thus, Due to above two reasons KK Incorporated is doing best in other words investor should invest in KK Incorporated.