Question

Presented below are condensed financial statements adapted from those of two actual companies competing as the primary players in a specialty area of the food manufacturing and distribution industry. ($ in millions, except per share amounts.)

Balance Sheets
	Metropolitan				Republic
Assets
Cash	$	282.3			$	43.1
Accounts receivable (net)		513.7				416.0
Short-term investments		—				8.3
Inventories		562.4				719.2
Prepaid expenses and other current assets		216.6				576.7
Current assets	$	1,575.0			$	1,763.3
Property, plant, and equipment (net)		2,702.2				2,656.5
Intangibles and other assets		297.3				597.9
Total assets	$	4,574.5			$	5,017.7
Liabilities and Shareholders’ Equity
Accounts payable	$	572.9			$	781.2
Short-term notes		312.1				644.4
Accruals and other current liabilities		685.2				620.5
Current liabilities	$	1,570.2			$	2,046.1
Long-term debt		648.6				648.3
Deferred tax liability		474.6				703.7
Other long-term liabilities		215.0				193.1
Total liabilities	$	2,908.4			$	3,591.2
Common stock (par and additional paid-in capital)		229.9				440.0
Retained earnings		2,567.9				1,695.9
Less: Treasury stock		(1,131.7	)			(709.4	)
Total liabilities and shareholders’ equity	$	4,574.5			$	5,017.7
Income Statements
Net sales	$	5,794.0			$	7,856.2
Cost of goods sold		(2,818.0	)			(4,385.7	)
Gross profit	$	2,976.0			$	3,470.5
Operating expenses		(1,649.7	)			(2,933.2	)
Interest expense		(83.8	)			(43.6	)
Income before taxes	$	1,242.5			$	493.7
Tax expense		(295.7	)			(68.1	)
Net income	$	946.8			$	425.6
Net income per share	$	1.6			$	7.7

Evaluate and compare the two companies by responding to the following questions.

Note: Because comparative statements are not provided you should use year-end balances in place of average balances as appropriate.

Metropolitan Republic Return on Assets % % Profit Margin % % Asset Turnover times times Return on Shareholders' Equity % % Equity Multiplier Acid-Test Ratio Current Ratio Receivables Turnover times times Inventory Turnover times times Times Interest Earned times times

Analysis

Which of the two firms had greater earnings relative to resources available?

Have the two companies achieved their respective rates of return on assets with similar combinations of profit margin and turnover?

From the perspective of a common shareholder, which of the two firms provided a greater rate of return?

Which company has made the most effective use of financial leverage?

Of the two companies, which appears riskier in terms of its ability to pay short-term obligations?

Which of the two companies manages their current assets more efficiently?

From the perspective of a creditor, which company offers the most comfortable margin of safety in terms of its ability to pay fixed interest charges?

Answer 1

This case has 7 questions, as it is not mentioned specifically which question's answer is required, I am attempting the first question i.e. Which of the two firms had greater earnings relative to resources available?

For ease of understanding, M would represent Metropolitan company, R would represent Republic and mn would represent Millions

Earning to resources ratio represent the company's ability to effectively utilizes one's assets.

It is represented by Return on Assets(ROA). The ratio is calculated by dividing net income by average total assets.

Since in given case we do not have opening balance of the asset to calculate average total assets and as mentioned in the question, we would use Closing balance instead of average asset while calculating ROA.

In the given case, Net income (M) = $ 946.8 mn and (R) = $ 425.6 mn

Net assets (M) = $ 4574.5 mn and (R) = $ 5017.7 mn

Return on asset = (Net income) / (Net Asset)

M = (946.8) / (4574.5) = 0.2069 ; to convert the value in % terms we multiply by 100 hence ROA = 20.69%

R = (425.6) / (5017.7) = 0.0848 ; multiply by 100, hence ROA = 8.48%

Hence from Return relative to resources point of view, Company M is better. Company M is better at utilizing its resources.