Question

Assume that you are considering purchasing stock as an investment. You have narrowed the choice to either Superiority Corporation stock or Internet Company stock and have assembled the following data for the two companies. Your strategy is to invest in companies that have low​ price-earnings ratios but appear to be in good shape financially. Assume that you have analyzed all other factors and that your decision depends on the results of ratio analysis.
1. Compute the following ratios for both companies for the current year, and decide which company's stock better fits your investment strategy. a. Quick (acid-test) ratio b. Inventory turnover c. Days' sales in average receivables d. Debt ratio e. Times-interest-earned ratio f. Return on common stockholders' equity g. Earnings per share of common stock h. Price-earnings ratio

Answer 1

			Superiority	Internet
a	Quick ratio	=(current assets-inventories-prepaid expenses)/current liabilities	0.62	0.63
			=(451000-210000-18000)/361000	=(414000-185000-13000)/341000
b	Inventory trunover	=cost of goods sold/average invenotries	2.19	1.99
			=456000/((210000+206000)/2)	=382000/((185000+198000)/2)
c	Days sales in average receivables	=Average accounts receivable*365/total credit sales	101.46	126.62
			=(((189000+144000)/2)*365)/599000	=(((162000+196000)/2)*365)/516000
d	Debt ratio	Total liabilities/total assets	0.69	0.73
			=670000/977000	=687000/935000
e	Times interest earned ration	EBIT/interest expenses	-	4.75
				=76000/16000
f	Return on common equity	=(net income-preferred dividend)/average common equity	0.53	0.78
			=61000/115000	=(40000-1200)/50000
g	EPS	=(net income-preferred dividend)/no. of shares equity	0.53	3.88
			=(61000)/115000	=(40000-1200)/10000
h	PE ratio	price/eps	10	4.97
			=5.3/0.53	=3.88/0.78

Internet company's PE ratio has low PE ration and is financially fit accoriding to all ration. So Interment company should be selected.