11 May WHAT FACTORS MIGHT LIMIT THE EFFECTIVENESS OF USING RATIO ANALYSIS?
Financial Statement Analysis. (Put an article link to support your
answer)
Describe three to five industry average
ratios and explain how a company management might use the information.
What factors might limit the
effectiveness of using ratio analysis?
Problem 1
You have the
opportunity to invest $10,000 in one of two companies that are part of the same
industry. The only information you have about the companies is presented below.
Assume that high means in the top third of the industry, average means in the
middle third and low is in the bottom third. Based on this information, which
company would you select? Explain you selection.
Ratio Company
A Company B
ROA Average High
Profit Margin Low High
Financial Leverage Low High
Current ratio High Low
Price/Earnings Average High
Debt-to-Equity Low High
Problem 2
Below are current
year financial statements for two companies in the same industries and direct
competitors. Both companies have been in operation approximately the same
length of time.
Company A
Company B
Balance Sheet
Cash
31,000
16,000
Accounts receivable
(net)
29,000
24,000
Inventory
87,000
29,000
Property and
equipment, net
125,000
394,000
Other assets
79,000
298,000
Total assets
351,000
761,000
Current liabilities
91,000
47,000
Long-term debt (5%
interest)
62,000
58,000
Capital stock ($5
par)
145,000
505,000
Contributed capital
in excess of par
18,000
103,000
Retained earnings
35,000
48,000
Total liabilities and stockholders
equity
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