Question

Please describe the circumstances of the following case study and recommend which company to purchase. Explain your approach to the problem, perform relevant calculations and analyses, and justify your recommendation. Ensure your work and conclusions are thoroughly supported.

Case Study:

You work in the mergers and acquisitions department of a large conglomerate who is looking to invest in a retail business. Two companies, Fashion Forward and Dream Designs, are the final two options being considered. You have the most recent available income statements and two years of balance sheets for each company.

Compute the following ratios for each company:

• Profit Margin Ratio
• Return on Assets
• Current Ratio
• Quick Ratio
• AR Turnover Ratio
• Average Collection Period
• Inventory Turnover Ratio
• Average Sales Period
• Debt to Equity Ratio

For this assignment:

• Compute all required amounts and explain how the computations were performed
• Evaluate the results for each company and explain what each ratio means
• Compare and contrast the companies.
• Based on your analysis:
  • recommend which company the organization should pursue
  • Thoroughly support your conclusion, including what other factors should be considered
  • Be specific.

Answer 1

RATIOS	FORMULAE	SIGNIFICANCE
PROFIT MARGIN RATIO	Gross Profit Net Sales	The gross margin ratio compares the gross profit of a company to its net sales to show how much profit a company makes after paying off its cost of goods sold
RETURN ON ASSETS	Net Income псоте Totla Assets	The return on assets ratio measures how efficiently a company is using its assets to generate profit
CURRENT RATIO	Current Assets Current Liabilities	The current ratio measures a company’s ability to pay off short-term liabilities with current assets
QUICK RATIO	Current Assets – Inventories Current Liabilities	The acid-test ratio measures a company’s ability to pay off short-term liabilities with quick assets:
AR TURNOVER RATIO	Net Credit Sales Avg. Receivables	The accounts receivable turnover ratio measures how many times a company can turn receivables into cash over a given period
AVG. COLLECTION PERIOD	365 or 12 or 52 AR Turnover ratio	The average collection period is the average number of days between the dates that credit sales were made, and the dates that the money was received/collected from the customers.
INVENTORY TURNOVER RATIO	Cost of goods sold Avg. Inventory	The inventory turnover ratio measures how many times a company’s inventory is sold and replaced over a given period
AVG. SALES PERIOD	x 365 days Avg.Inventory Cost of sales	This ratio measures the avg. number of days taken to sell inventory one time.
DEBT TO EQUITY RATIO	Total debt Equity	The debt to equity ratio calculates the weight of total debt and financial liabilities against shareholders equity

The date of none of the companies is given in the question, so, I have mentioned the formulae of all the ratios and their respective meanings.

The company - which has positive and comparatively better ratios is the company to be chosen.