Question

From the two companies below, which would you purchase and why based on the following financial ratios:

Company A   Company B

Current Ratio                                     Current Ratio

1.05:1                                                      1.13:1

Debt / Equity Ratio                            Debt / Equity Ratio

50.58%                                           47.36%

Gross Profit Margin                             Gross Profit Margin

17.01% 19.82%

Return on Common Equity                  Return on Common Equity

13.04% 6.48%

Earnings Per Share                             Earnings Per Share

$10.61                                            $2.11

P/E Ratio                                          P/E Ratio

9.70                                                12.29

Answer 1

Ans: I think Company B should be Selected

As per the Current Ratio it can be seen that Company B is Good as current assets are more than current liabilities as compared to company A, in company A current assets are less than the current B therefore company B Should be Selected

As per the Debt Equity Ratio it can be seen that company debt are less which is beneficial for an company as the amount can be rotated fast and company Profitability is good Equity is more and debt is less as compared to company A

As per Gross profit margin , Company B should be opted as it means Company B's Gross Profit is More as compared to Company A, more the gross profit then more will be the net profit and Company A gross profit is less

And these above three ratios are important for any of the company as current assets should be more and current liabilities are less for any of the company, and Company aim is to have More gross profit and Debt shoudl be less