Question

The basic earnings per share of Hauser Corporation and Reeves, Inc. were $4 and $5, respectively for the year ended December 31, 2019.

A. Which would you prefer to own and why?

B. List 5 ratios or other information that would be helpful in making your decision?

Answer 1

Required A: We would prefer Reeves Inc ($5) as its earnings per share is greater than Hauser Corporation ($4).

Earnings per share is an important financial measure, which indicates the profitability of a company. The higher the earnings per share of a company, the better is its profitability.

Earning per share = Net income / Number of shares outstanding.

Required B:

5 ratios that would be helpful in making your decision:

1) P/E ratio: It shows how much stock investors are paying for each rupee of earnings. P/E ratio = Market price per share / Earning per share.

2) Debt to equity ratio: It shows how much a company is leveraged, that is, how much debt is involved in the business. Debt to equity ratio = Total liabilities / Shareholder's equity.

3) Return on equity: It measures the return that shareholders get from the business and overall earnings. Return on equity = Net income / Shareholder's equity.

4) Current ratio: It is a liquidity ratio that measures a company's ability to pay short-term obligations or those due within one year. Current ratio = Current assets - Current liabilities.

5) Asset turnover ratio: It shows how efficiently the management is using assets to generate revenue. Asset turnover ratio = Net sales / Average total assets.