Question

Application Problem 12-12A a (Basic strategies) You are considering investing in the retail sector and have identified two companies for further analysis Financial information for the two companies is as follows: (in thousands) Sales Company A Company B $1,286,000 $1,364,000 Cost of goods sold 758,740 995,720 60,000 Net income 97,500 Average inventory Average total assets 210,900 152,500 859,960 529,206 (a) Calculate and compare the following ratios for the two companies: (Round answers to 1 decimal place, e.g. 18.4 or 15.3%.) . Return on assets i. Gross margin iii. Profit margin iv. Inventory turnover v. Days to sell inventory Company A Company B Return on assets Gross margin Profit margin % % Inventory turnover times times Days to sell inventory days days

Answer 1

Return on Assets =Net Income / Average Total Assets	Company A	Company B
Return on Assets =$97,500 / $859,960	11.3%
Return on Assets =$60,000 / $529,206		11.3%
Gross Margin =(Sales-Cost of goods sold) / Sales
Gross Margin =($1,286,600 - $758,740) / $1,286,600	41.0%
Gross Margin =($1,364,000 - $995,720) / $1,364,000		27.0%
Profit margin =Net Income / Sales
Profit margin =$97,500 / $1,286,600	7.6%
Profit margin =$60,000 / $1,364,000		4.4%
Inventory Turnover ratio =COGS / Average Inventory
Inventory Turnover ratio =$758,740 / $210,900	3.60
Inventory Turnover ratio =$995,720 / $152,500		6.53
Days to sell inventory =365 days / Inventory Turnover ratio
Days to sell inventory =365 days / 3.60	101.4
Days to sell inventory =365 days / 6.50		56.2