Question

Westfield Capital Management Co.'s equity investment strategy is to invest in companies with low price-to-book ratios, while considering differences in solvency and asset utilization. Westfield is considering investing in the shares of either Jerry's Departmental Stores (JDS) or Miller Stores (MLS). Selected financial data for both companies follow:

SELECTED FINANCIAL DATA AS OF MARCH 31, 2006
($ millions)	JDS	MLS
Sales	$21,250	$18,500
Fixed assets	5,700	5,500
Short-term debt		1,000
Long-term debt	2,700	2,500
Equity	6,000	7,500
Outstanding shares (in millions)	250	400
Stock price ($ per share)	51.50	49.50

Required:

a. Compute each of the following ratios for both JDS and MLS:

(1) Price-to-book ratio

(2) Total-debt-to-equity ratio

(3) Fixed-asset-utilization (turnover)

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b. Select the company that better meets Westfield's criteria.

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c. The following information is from these companies' notes as of March 31, 2006:

(1) JDS conducts a majority of its operations from leased premises. Future minimum lease payments (MLP) on noncancellable operating leases follow ($ millions):

MLP
2007	$ 259
2008	213
2009	183
2010	160
2011	155
2012 and later	706
Total MLP	$ 1,676
Less interest	(676)
Present value of MLP	$ 1,000
Interest rate	10%

(2) MLS owns all of its property and stores.

(3) During the fiscal year ended March 31, 2006, JDS sold $800 million of its accounts receivable with recourse, all of which was outstanding at year-end.

(4) Substantially all of JDS's employees are enrolled in company-sponsored defined contribution plans. MLS sponsors a defined benefits plan for its employees. The MLS pension plan assets' fair value is $3,400 million. No pension cost is accrued on its balance sheet as of March 31, 2006 (note that MLS accounts for its pension plans under SFAS 87). The details of MLS's pension obligations follow:

($ millions)	ABO	PBO
Vested	$ 1,550	$ 1,590
Nonvested	40	210
Total	$ 1,590	$ 1,800

Compute all three ratios in part (a) after making necessary adjustments using the note information. Again, select the company that better meets Westfield's criteria. Comment on your decision in part (b) relative to the analysis here.

Answer 1

Ratios: Determination of ratios is important part of the longevity for the business. The ratios help in measuring the efficiency, profitability, performance etc., of the business.

They also help in comparing similar business.

a.

Price to book ratio is the ratio which measures the market price to book value.

Total Debt to equity ratio is also a leverage ratio which is also known as risk, gearing and leverage. It indicates company’s assets and debts financed in the company.

Fixed Asset utilization ratio is the ratio which measures the asset utilization for each unit of sale.

Computation of various ratios for JDS and MLS

b.

Price to book ratio is ideal less than 1.

JDS’ price to book ratio is 2.15 while MLS’ ratio is 0.26.

Thus, MLS price to book ratio is better.

Total debt to equity ratio is ideal between 1 and 2.

JDS’ debt to equity ratio is 0.45 while MLS’ ratio is 0.47.

Hence, JDS ratio is better.

Fixed asset utilization ratio is higher the better.

In the given situation the JDS asset utilization ratio is 3.73 times while MLS’ asset utilization ratio is 3.36 times.

Hence, JDS has better asset utilization ratio.

Overall in the above scenarios, JDS is better.