Question

deteriorated during 2018 and (b) whether the investment attractiveness of its com- mon stock appears to have increased or decreased P15-35B Using ratios to decide between two stock investments Assume that you are purchasing an investment and have decided to invest in a company in the digital phone business. You have narrowed the choice to All Digital Corp and Green Zone, Inc. and have assembled the following data. Selected income statement data for the current year: C. All Digital Green Zone Cost of Goods Sold Interest Expense Net Income Net Sales Revenue (all on credit) 417,925 $493,115 209,000 258,000 14,000 72,000 58,000 100

Answer 1

1.

	Ratio	Computation	All Digital	Green Zone
a.	Acid Test Ratio	( Total Current Assets - Merchandise Inventory - Prepaid Expenses ) / Total Current Liabilities	0.94 : 1	0.85: 1
b.	Inventory Turnover	Cost of Goods Sold / Average Merchandise Inventory	2.88 times	2.70 times
c.	Days Sales in Receivables	(365 x Average Accounts Receivable) / Net Sales	34.93 days	38.12 days
d.	Debt Ratio	Total Liabilities / Total Assets	57.07 %	66.01 %
e.	Earnings per Share of Common Stock	Net Income / Average Common Shares Outstanding	$ 5.80	$ 5.14
f.	Price/ earnings Ratio	Market Price per Share / Earnings per Share	16 times	25 times
g.	Dividend Payout	Dividend per Share / Earnings per Share	20.69 %	17.51 %

All Digitals' stock is better because of the following reasons:

• Lower price/earnings ratio
• Higher acid test ratio
• Higher inventory turnover
• Lower days sales in receivables
• Lower debt ratio, i.e lower financial risk.
• Higher earnings per share
• Higher dividend payout.