Requirements
Assume that you are considering purchasing stock as an investment. You have narrowed the choice to Topline.com and E-shop Stores and have assembled the following data.
Selected income statement data for current year:
|
Topline.com E-Shop Stores
|
|
Net sales (all on credit)
|
$598,000
|
$518,000
|
|
Cost of goods sold
|
452,000
|
382,000
|
|
Income from operations
|
95,000
|
69,000
|
|
Interest expense
|
-
|
11,000
|
|
Net income
|
63,000
|
37,000
|
Selected balance sheet and market price data at the end of the current year:
|
|
Topline.com
|
E-Shop Stores
|
|
Current assets:
|
|
|
|
Cash
|
$ 28,000
|
$ 36,000
|
|
Short-term investments
|
9,000
|
11,000
|
|
Current receivables, net
|
187,000
|
166,000
|
|
Inventories
|
219,000
|
186,000
|
|
Prepaid expenses
|
15,000
|
13,000
|
|
Total current assets
|
458,000
|
412,000
|
|
Total assets
|
984,000
|
935,000
|
|
Total current liabilities
|
371,000
|
340,000
|
|
Total liabilities
|
663,000
|
700,000
|
|
Preferred stock: 8%, $150 par
|
|
30,000
|
|
Common stock, $1 par (100,000 shares)
|
100,000
|
|
|
$5 par (10,000 shares)
|
|
50,000
|
|
Total stockholders' equity
|
321,000
|
235,000
|
|
Market price per share of common stock
|
$ 6.93
|
$ 58.82
|
Selected balance sheet data at the beginning of the current year:
|
|
Topline.com
|
E-Shop Stores
|
|
Balance sheet:
|
|
|
|
Current receivables, net
|
$143,000
|
$194,000
|
|
Inventories
|
212,000
|
199,000
|
|
Total assets
|
853,000
|
913,000
|
|
Long-term debt
|
-
|
310,000
|
|
Preferred stock, 8%, $150 par
|
|
30,000
|
|
Common stock, $1 par (100,000 shares)
|
100,000
|
|
|
$5 par (10,000 shares)
|
|
50,000
|
|
Total stockholders' equity
|
259,000
|
219,000
|
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
2. Compute each company's economic-value-added (EVA) measure and determine whether the companies' EVA®s confirm or alter your investment decision. Each company's cost of capital is 6%.