Question

Problem 13-5A Comparative ratio analysis LO P3

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Summary information from the financial statements of two companies competing in the same industry follows.

	Barco Company			Kyan Company					Barco Company			Kyan Company
Data from the current year-end balance sheets								Data from the current year’s income statement
Assets								Sales	$	770,000		$	911,200
Cash	$	19,000		$	34,000			Cost of goods sold		584,100			644,500
Accounts receivable, net		33,400			54,400			Interest expense		8,200			10,000
Merchandise inventory		84,340			140,500			Income tax expense		14,800			25,155
Prepaid expenses		5,300			7,750			Net income		162,900			231,545
Plant assets, net		350,000			307,400			Basic earnings per share		3.70			5.12
Total assets	$	492,040		$	544,050			Cash dividends per share		3.78			3.92
Liabilities and Equity								Beginning-of-year balance sheet data
Current liabilities	$	60,340		$	104,300			Accounts receivable, net	$	26,800		$	52,200
Long-term notes payable		81,800			107,000			Merchandise inventory		55,600			107,400
Common stock, $5 par value		220,000			226,000			Total assets		418,000			402,500
Retained earnings		129,900			106,750			Common stock, $5 par value		220,000			226,000
Total liabilities and equity	$	492,040		$	544,050			Retained earnings		133,320			52,389

Problem 13-5A Part 2

2a. For both companies compute the (a) profit margin ratio, (b) total asset turnover, (c) return on total assets, and (d) return on common stockholders’ equity. Assuming that each company’s stock can be purchased at $80 per share, compute their (e) price-earnings ratios and (f) dividend yields. (Do not round intermediate calculations. Round your answers to 2 decimal places.)
2b. Identify which company’s stock you would recommend as the better investment.

Answer 1

ANSWER

(1)

profit margin ratio = net income/sales

for Barco company,

= $162,900/$770,000= 21.15%

for Kyan company,

= $231,545/$911,200= 25.41%

(2)

total assets turnover = sales/average total assets

for Barco company,

= $770000/{($492,040+ $418,000)/2} = 1.69 times

for Kyan company,

= $911,200/{($544,050+ $402,500)/2} = 1.93  times

(3)

return on total assets (ROTA) = earning before interest and taxes /average total assets

earning before interest and taxes = net income + income tax expense + interest expense

Therefore,

for Barco company,

= ($162,900+ $14800 + $8,200)/{($492,040+ $418,000)/2}

= 40.86%

for Kyan company,

= ($231,545+ $25,155+ $10,000)/{($544,050+ $402,500)/2}

= 56.35%

(4)

Return on common stockholders equity = (net income - preferred dividends)/average common stockholders equity

Common stockholders equity = common stock + retained earnings

for Barco company,

Average common stockholders equity = {($220,000+ $129,900) + ($220,000+ $133,320)}/2 = $351,610

Therefore,

Return on common stockholders equity = ($162,900- $0)/$351,610= 46.33%

for Kyan company,

Average common stockholders equity = {($226,000+ $106,750) + ($226,000+ $52,389)}/2 = $305,569

Therefore,

Return on common stockholders equity = ($231,545- $0)/$305,569= 75.77%

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