ABC Company and XYZ Company are competitors in the manufacturing industry. The following ratios and financial information have been compiled for these two companies for the most recent year:
|
Financial ratios
|
ABC
|
XYZ
|
|
Liquidity
|
|
|
|
Current (times)
|
0.92
|
1.51
|
|
Quick (times)
|
0.61
|
1.20
|
|
Cash flow liquidity (times)
|
0.35
|
0.85
|
|
Cash flow from operations (in millions of $)
|
995
|
2,520
|
|
Activity
|
|
|
|
Accounts receivable turnover (times)
|
5.48
|
6.20
|
|
Inventory turnover (times)
|
4.75
|
4.00
|
|
Payables turnover (times)
|
2.82
|
3.55
|
|
Fixed asset turnover (times)
|
2.49
|
3.62
|
|
Total asset turnover (times)
|
1.10
|
1.10
|
|
Leverage
|
|
|
|
Debt ratio (%)
|
76.02
|
51.21
|
|
Times interest earned (times)
|
12.31
|
17.28
|
|
Cash interest coverage (times)
|
9.89
|
30.19
|
|
Cash flow adequacy (times)
|
0.43
|
1.35
|
|
Profitability
|
|
|
|
Gross profit margin (%)
|
43.08
|
43.11
|
|
Operating profit margin (%)
|
16.23
|
8.84
|
|
Net profit margin (%)
|
11.26
|
4.80
|
|
Cash flow margin (%)
|
6.98
|
12.59
|
|
Return on assets (%)
|
9.77
|
4.63
|
|
Return on equity (%)
|
40.86
|
10.23
|
|
Cash return on assets (%)
|
6.87
|
12.54
|
|
Earnings per share
|
4.59
|
1.19
|
|
Closing stock price
|
$41 per share
|
$35 per share
|
Required:
(a) Compare and evaluate the strengths and weaknesses of ABC and XYZ Companies.
(b) Calculate the price-to-earnings (P/E) ratios for both firms. Explain what a P/E ratio tells an analyst. What could be the cause of the difference between ABC's and XYZ's P/E ratios?