Question

Please take a look below at the two companies' financial ratios. Use the material your learned in the chapter to try and identify the industries these two companies operate in. You are going to be graded on the quality of your analysis and arguments (e.g. this ratio indicates that... and that ratio indicates the other,... and taken together these ratios indicate that.... (and so forth)) :

Company A.      
P/E Ratio: 30
Price/Sales: 6
Price/Book Value of Equity: 7.5
Profit Margin: 20%
Operating Margin: 25%
Return on Assets (ROA): 6%
Return On Equity (ROE): 25%
Current Ratio: 3

Company B
P/E Ratio:   17
Price/Sales: 0.6
Price/Book Value of Equity: 3
Profit Margin: 3%
Operating Margin: 5%
Return on Assets (ROA): 7%
Return On Equity (ROE): 15%
Current Ratio: 1

Answer 1

Answer: Analysis-

P/E Ratio- Price earning ratio tells the relationship between share price of the company and earning per share, it tells how much investors are paying for one stock and how much earning, they are getting on the same stock.

Company A's P/E ratio is higher than company B's P/E ratio, it means company A's share price is higher with respect to its earning per share rather than company B's share.

Price/Sales- This ratio tells the relationship between market capitalization of the company and revenue of the company. It is sales multiple that indicates whether the stock is valued properly or not.

Company A's price to sales ratio is higher than company B's price/sales that indicates that company A's share price is higher than company B's price relative to its sales. It shows that investor paid higher price for company A with respect to its sales rather than company B.

Price/Book Value of Equity- Price to book value ratio tells the relationship between market price per share and book value per share, this ratio indicates the relationship between market value of share relative to its book value per share.

Company A's market price is higher than its book value per share while company B's market price is lower than its book value per share.

Profit Margin- This ratio indicates the profitability of the company that is calculated by dividing net profit by sales.

Company A's profit margin is higher than company B's profit margin.

Operating Margin- This ratio indicates operating profitability of the company that is calculated by dividing operating profit by sales.

Company A's Operating margin is higher than company B's operating margin that indicates company A is more profitable than company B

Return on Assets (ROA)- This ratio indicates return generated on total assets. It is calculated by dividing net profit by assets.

Company B's ROA is higher than company A's ROA.

Return On Equity (ROE)- This ratio indicates the return generated on shareholder's equity. It is calculated by dividing net profit by equity.

Company A's ROE is higher than company B's ROE that indicates company A's shareholders are getting more return than company B

Current Ratio- This ratio indicates the liquidity position  of the company. It is calculated by dividing current assets by current liabilities.

Company A's current ratio is higher than company B's current ratio that indicates company A is more liquid than company B.