Question

need help with the first part of the question, not the article part.

You have just received a large annual bonus at work, and have decided to invest it in stocks for your retirement. You have been analyzing different stocks and have narrowed your choice to two possibilities. You can either invest in Amazing Company, or in EBUY. EBUY's ratios are given below. Select 3 ratios you might use to determine which stock to invest in and make a choice. Defend your selection with quality reasoning. The second part of your analysis is to read the article attached to this assignment. On pages 117-120, there is a chart that summarizes some of the differences between GAAP and IFRS. Explain the general similarities and differences, and discuss how interest expense would be presented on the Statement of Cash Flows. Include in your discussion any differences between GAAP and IFRS. Would that impact your investment decision above? Your answer will be graded on analysis, logic, and writing skills

below are Ebuy's ratios

below are Amazing company's ratios

Answer 1

To determine which stock to invest in I will make use of the following 3 ratios:

1. Price/Earnings ratio (P/E)
2. Rate of Return on Stockholder’s equity
3. Dividend payout ratio

Let us first consider the P/E ratio. This ratio is computed by dividing the price per share with earnings per share. This ratio is used to determine how cheap or how expensive a stock is. P/E of EBUY is 14.50 and this means that investors are willing to pay $14.50 for every $1 in earnings of the company. Amazing’s P/E ratio is 8.89 and this shows that investors are willing to pay $8.89 for every $1 in earnings of the company. This means that investors value EBUY’s stock at a premium and the reason for high P/E must be because of better future prospects for EBUY when compared to Amazing.

The next ratio is return on stockholder’s equity (ROE). This ratio is computed by dividing the net income with total amount of equity and then determining the percentage. EBUY’s ROE stands at 15% while that of Amazing stands at 9.45%. Thus EBUY generates a higher return for the shareholders than Amazing.

The dividend payout ratio shows the percentage of net income that is paid out as dividends. EBUY’s dividend payout is 12% while that of Amazing is 37.04%.

Looking at the above ratios I will invest in EBUY and not in Amazing. This is because EBUY has a better prospect than Amazing and this is indicated by the stock’s higher P/E ratio. Secondly EBUY generates a much higher ROE than Amazing. Although EBUY’s dividend payout ratio is lower than Amazing it will not cause much concern to me as EBUY’s stock will offer good growth potential in the long term and so lower dividend payout will be more than compensated by a much higher quantum of capital appreciation.