Question

Evaluate the financial ratios for these two firms and describe any trends in the firms as well as any similarities and/or differences between the two. Opine on the two firms' liquidity, asset management, profitability, and financial leverage.

		Firm A				Firm B
Income Statement	2016	2015	2014		2016	2015	2014
Revenues	58,811	63,740	49,853		350,052	347,379	349,894
Direct Costs	35,830	38,206	30,616		258,040	257,846	260,776
Gross Profit	22,981	25,534	19,237		92,012	89,533	89,118
Indirect Costs	6,611	6,116	4,923		72,752	69,315	66,727
Operating Income	16,370	19,418	14,314		19,260	20,218	22,391
Interest & Other Non-Oper Exp	368	350	267		1,090	1,105	1,251
Earnings Before Taxes	16,002	19,068	14,047		18,170	19,113	21,140
Income Tax	4,278	5,215	3,811		6,389	6,572	7,642
Net Income	11,724	13,853	10,236		11,781	12,541	13,498
Balance Sheet
Cash & Cash Equiv	47,409	45,133	29,134		11,397	11,287	12,929
Accounts Receivable	29,299	30,343	31,527		10,699	10,557	11,343
Inventory	12,133	12,355	18,199		22,328	23,290	24,426
Total Current Assets	88,841	87,831	78,860		44,424	45,134	48,698
Net Property, Plant, & Equipment	25,119	22,471	20,624		71,066	71,970	74,672
Intangible Assets	8,941	8,816	8,744		11,513	11,246	10,203
Total Assets	122,901	119,118	108,228		127,003	128,350	133,573
Accounts Payable	51,161	49,661	47,559		41,912	49,147	53,440
Short-Term Debt	11,605	10,999	4,308		33,341	17,095	16,738
Long-Term Debt	16,477	4,399	987		11,430	16,814	18,703
Shareholders Equity	43,658	54,059	55,374		40,320	45,295	44,692
Total Liabilities & Equity	122,901	119,118	108,228		127,003	128,351	133,573
Dupont Analysis:
Net Profit Margin	19.9%	21.7%	20.5%		3.4%	3.6%	3.9%
Total Asset Turnover	0.48	0.54	0.46		2.76	2.71	2.62
Equity Multiplier	2.82	2.20	1.95		3.15	2.83	2.99
Return on Equity	26.9%	25.6%	18.5%		29.2%	27.7%	30.2%
Current Ratio	1.42	1.45	1.52		0.59	0.68	0.69
Quick Ratio	1.22	1.24	1.17		0.29	0.33	0.35
Cash Ratio	0.76	0.74	0.56		0.15	0.17	0.18
Inventory Turnover (Sales basis)	4.8	5.2	2.7		15.7	14.9	14.3
Accounts Receivable Turnover	2.0	2.1	1.6		32.7	32.9	30.8
Fixed Asset Turnover	2.3	2.8	2.4		4.9	4.8	4.7
Debt Ratio	64%	55%	49%		68%	65%	67%

Answer 1

a. Liquidity: Firm A is much better than Firm B when we compare the liquidity ratios - Current, quick and cash ratio. The current ratio and quick ratio being above 1 indicates that firm A has enough current assets to cover for all the current liability. In firm B, the current ratio is less than 1 indicating the firm lacks current assets to cover for current liability and will have to resort to short term borrowing for meeting the current liabilities

b. In terms of asset management firm B is better than firm A. As we can see it has a higher inventory turnover, accounts receivable turnover and fixed asset turnover. This means firm B has quicker replacement of inventory which means indicates quick sales. A high accounts receivable turnover indicates that the firm has more cash sales and collection of accounts receivable is efficient.

c. Profitability: Here firm A is better than firm B. If we see the profit margin of firm A, it is much higher than that of firm B. This indicates that firm A is having lower operating costs which boosts its net income and hence the profit margin is higher. Firm B has to reduce operating costs to increase income and profit margin

d. Leverage ratios: Here as well firm A scores better than firm B. As we can see, firm B has a higher debt ratio when compared to firm A. This means that firm B has higher debt which is not a good thing and investor do not like firms with high debt as this can increase bankruptcy costs.