Question

Would you invest in the foloowing company why or why not? How well has the company’s management pursued their goal of maximizing shareholder wealth?           

Company A	2015	2016	2017
Current ratio	1.19	1.04	1.25
Quick ratio	0.64	0.67	0.84
Inventory turnover	6.5	6.34	6.59
Average collection period	14	13	13
Return on common equity	49.73	48.18	50.9
Net profit margin	14.39	13.22	12.89
Debt ratio or Debt/Equity ratio	0.4	0.54	0.72
Return on assets	23.77	21.05	20.11
Earnings per share	1.82	1.9	1.97
Price/earnings ratio	32.88	28.81	28.08

Answer 1

current ratio = current asset / current liabilities. for the mentioned company A current ratio has increased and surpassed its 2015 level. which means company has either increased its assets or have deacreased its liabilities. in both the cases company has become stronger to achieve its goals.

quick ratio = (cash+ market securities + account receivables) / current liability. for company A quick ratio which shows more strict position of financial strength of a company, has also increased above its 2015 level which means company has enough cash accrual to pay its liability.

inventory turnover = net sales/ average inventory.for company A, it has also passed 2015 level which means company has increased its sales figures which in turn will generate more revenue and profit.

average collection period means days company takes to get its money back for credit sale,it is also deacreasing for company A means company has better cash accrual method.

return on commom equity = net income - preffered dividend / common equity. for company A it is gone past 2015 level means company has increased its income and generated more wealth for its investors.

net profit margin = net profit / total revenue. it has deacreased for company A which is due to more interest payments on debt which has decreased its net profit.

debt to equity ratio = total debt / total asset. it has increased sharply in 2017 means company A has taken debt in 2017 to increase its business potential in turn to increase more revenue and profits in future.

return on asset = net income / total asset. it has also decreased for company A means either company has reduced its net income or increased its assets regularly. looking above data of company, total asset of the company has increased by taking debt to increase its business potential.

earnings per share = (net income - preffered dividend)/ average outstanding share. it has also increased for company A means income of the company has increased regularly since 2015.

price/earnings ratio = market value per share / earning per share. it has come down due to part by increase in earnings per share which is a good sign and part by fall in market value of share which is a good situation to invest in the company.

now looking to above details of the company, yes i would like to invest in the company because of sustained income, better customers as per average collection period and increased assets by taking debt to increase its business potential in turn more income and profits.

company management has increased sales and income to increase profit of the company which is shown by return on common equity means it has persued satisfactorily to maximize shareholders wealth.