Question

Company Firm 1 Profit a. Fill in the following information for the SIX NON-financial companies of your choice. Firm 2 Firm 3 Firm 4 Firm 5 Firm 6 name Current Ratio B - Ratio Asset Turnover Debt/Equity Margin Price to Earning Market to Book Closing Stock price (une 1st) a. Please explain the ratios of the firms to the potential investors of these five stocks.(Use the structure of the textbook and compare them with the industry averages, if possible) Short-term solvency or liquidity ratios: The current ratio is smaller than one, which is not that great. Long-term solvency or financial leverage ratios: The total debt ratio is 0.58, which is in a good shape. Asset management or turnover ratios: Asset turnover is 2.38. This is high. Walmart utilizes its assets well. Profitability ratios: Market value ratios: Both Market to Book and Price to earning ratios are below the industry averages. The stock is underpriced.

Answer 1

Firm 1 Firm 2 Firm 3 Firm 4 Firm 5 Firm 6 Company name Current Ratio Debt/equity ratio 1.2 1.08 3.8 2.3 1.5 N 0.89 1.25 2.12 0.2 0.72 1.9 1.3 3.6 4.8 2.8 3.4 2.7 12% 33% 28% 18% 39% 41% Asset turnover ratio Profit margin Price to earning Market to book 5.2 18 13.6 22.2 30.8 15.66 2.45 12.8 6.4 18.48 16.64 17.3 Closing stock price (June 1st) 240 1445 64 36 765 434

Ratio comparison chart Market to book Price to earning Profit margin Asset turnover ratio Debt/equity ratio Current Ratio 0 5 10 15 20 25 30 35 Firm 6 Firm 5 Firm 4 Firm 3 Firm 2 Firm 1

It can be clearly seen that the current ratio is higest for firm 4 with a ratio of 3.8, which represent that firm 4 have greater capacity too solve short term liability. In the other hand firm 2 have the lowest one, which is not good for firm 2. However a higher current ratio represents the ability to dealing with current liability, but if current ratio is too high even than the industry level, then it can also indicate that the firm have ideal money, which is either need to invested or should be distributed as dividend.

Debt equity ratio is the relation between owner's investment and outsourced finance. A low debt equity ratio is more favourable, as it represents that the owner's equity is higher than debt funds. Here in firm 4, you can see the debt equity ratio is smallest (ie: 0.20). It represent that the owner borrowed only 20 cents for each 1 dollar of his own investment. But in case of firm 3, the number is too high (ie: 2.12), so the firm have a greater debt, which is not good for firm 3.

Asset turnover ratio indicates the utilisation of firm's assets. Here firm 3 have the highest number in this (ie: 4.8), that means firm 3 utilise their asset more efficiently. But firm 1 is not so good in manage their assets with a very poor asset turnover ratio of 1.3 only.

Price to earning (P/E ratio) and price to book (P/B ratio) both are good indicator for the value of underlying asset. P/E ratio compare the earning per share (EPS) with market price and B/B ratio compare the book value per share with market price. Both are favourable with lower number. Here firm 1 is good for value investment, as the share of the firm is available in comparatively lower price to it's earning, with a P/E ratio of 5.2. Firm 1 is also provide greater book value with smaller price.