Assume that you are considering purchasing stock as an investment. You have narrowed the choice to and E-shop Stores and have assembled the following data.
Selected income statement data for current year:

Selected balance sheet and market price data at the end of the current year:

Selected balance sheet data at the beginning of the current year:

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. 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 is12%.

  • CreatedDecember 10, 2012
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