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		$	890,200
Cash	$	19,500		$	32,000			Cost of goods sold		590,100			642,500
Accounts receivable, net		36,400			51,400			Interest expense		9,300			17,000
Merchandise inventory		84,840			134,500			Income tax expense		14,800			24,576
Prepaid expenses		5,300			7,450			Net income		155,800			206,124
Plant assets, net		320,000			309,400			Basic earnings per share		4.33			5.00
Total assets	$	466,040		$	534,750			Cash dividends per share		3.77			3.95
Liabilities and Equity								Beginning-of-year balance sheet data
Current liabilities	$	60,340		$	92,300			Accounts receivable, net	$	27,800		$	58,200
Long-term notes payable		80,800			101,000			Merchandise inventory		55,600			109,400
Common stock, $5 par value		180,000			206,000			Total assets		458,000			412,500
Retained earnings		144,900			135,450			Common stock, $5 par value		180,000			206,000
Total liabilities and equity	$	466,040		$	534,750			Retained earnings		124,820			92,066

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 $75 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

			Barco Company		Kyan Company
(a)	Profit margin ratio	Net income / Sales	155,800 / 770,000	20.23%	206,124 / 890,200	23.15%
(b)	Total Asset turnover	Sales / Total Assets	770,000 / 458,000	1.68	890,200 / 412,500	2.16
(c)	Return on total assets	Net Income / Total Assets	155,800 / 458,000	34.02%	206,124 / 412,500	49.97%
(d)	Return on common stockholders equity	Net Income / Total Equity	155,800 / 304,820	51.11%	206,124 / 298,066	69.15%
(e)	PE Ratio	MPS / EPS	75 / 4.33	17.32	75 / 5	14.99
(f)	Dividend yield	Dividend per share / Market price	3.77 / 75	5%	3.95 / 75	5%

If you look at most ratios Kyan company seems much better.