Question

Below are selected ratios for three companies which operate in three different industries:

Industry A B C

COGS/Sales 80% 58% n/a

R&D/Sales 0% 7% 0.1%

Advertising/Sales not defined 3% 0.1%

Internet/Sales 0.9% 1% 6%

Net Income/Sales 2.5% 10% 10%

Return on Assets 8.5% 10.6% 7.2%

Inventory Turnover 5.5 4 n/a

AR Turnover 100 6 9

Long-term Debt/Equity 60% 50% 40%

n/a = not available Identify which industry each of the companies A, B, and C operate in. Give two reasons for each of your selections.

Answer 1

	Company		A	B	C	Basis of Opinion	Selection
Ratio	Formula	Ratios Given In %
COGS/Sales	COGS/Sales*100	%	80	58	N/A	Lower is Better	B
R&D / Sales	R&D / Sales*100	%	0	7	0.1	Lower is Better	A
Advertising/Sales	Advertising/Sales*100	%	N/A	3	0.1	Lower is Better	C
Internet/Sales	Internet Expenses/Sales*100	%	0.9	1	6	Lower is Better	A
Net Income/Sales	Net Income/Sales*100	%	2.5	10	10	Higher is Better	B/C
Return on Assets	Net Profit/ Average Assets*100	%	8.5	10.6	7.2	Higher is Better	B
Inventory Turnover	COGS/Average Turnover*100	%	5.5	4	N/A	Higher is Better	A
AR Turnover	Sales/ Average Accounts receivables*100	%	100	6	9	Higher is Better	A
Long-term Debt/Equity	Long-term Debt/Equity *100	%	60	50	40	It should be 2:1	B
Reason Given For Ratio
First four ratios are related with cost therefore Lower are Better and Next four ratios are related with return therefore Higher are Better. In case of Debt Equity Ratio 2:1 is best ratio.
Identification of Industry
Company A	It is operating in Monopoly Industry as there is no advertising Expenses and no Research and development Expenses
Company B	It is a operating in High Growth Industry as Return on Sales and Return on Assets both ratios are High in this company
	and also Debt Equity Ratio is 2:1 i.e Ideal ratio.
Company C	It is operating in service sector as there in no Cost of Goods sold and no Investory.