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	Company B
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	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

Company A has high price to earning ratio which is 30 comparatives to company B which is 17, high price to earning ratio is associated with companies which are high growth-oriented companies which is also evident from the high price to sales ratio of A which is 6 in comparison to company B which is 0.6. Price to sales ratio tells us as to what is the price investor is willing to pay for one unit of sales. Since investors are willing to pay more to company A, it must have high future growth possibility. The profit margin and operating profit margin of company A is significantly higher, both these ratios are profitability ratios and measures the firm ability to generate profitability. Net profit ratio is calculated as net income divided by total sales, it measures as to what percentage of total sales is converted into net income for the company and company A seems to performing better at this. Return on asset for company A and company B, both are very similar (small difference of 1%) but the return on equity of company A is quite higher than company B implying that company A is using more leverage than company B. Current ratio measures the ability to payoff the short-term debt so from the suppliers point of view, again company A is more safe. Company A seems to be operating in a high growth industry where it is experiencing good growth and good profit margin where as company B seems to be operating in an industry which is being operating in an industry which is at mature stage.