AC 580 Financial Statement Analysis

"Can You Distinguish the Difference"

Answers

Selected ratios for three different companies that operate in three different industries (merchandising, pharmaceuticals, utilities) are reported in the table below:

RATIO CO. A Co. B Co. C __

Gross profit margin ratio......................18%.................53%...................n.a.

Net profit margin ratio..........................2%.................14%................. 8 %

Research and development to sales.........0%.................17%.................. 0.1%

Advertising to sales..............................7%...................4%.................. 0.1%

Interest expense to sales......................1%...................1%................ 15%

Return on assets................................11%.................12%................. 7%

Accounts receivable (times)..................95.................... 5................. 11

Inventory turnover (times)................... 9.................... 3.....................n.a.

Long term debt to equity.....................64%.................45%................ 89%

Required:

1. Match the ratios to the type of firm

2.Give only two reasons to support your selection

Company A is the merchandiser - evidenced by:

• Low gross profit margin ratio
• Low net profit margin ratio
• High inventory turnover
• High accounts receivable turnover
• Higher advertising to sales ratio

Company B is the pharmaceutical - evidenced by:

• High gross profit margin ratio
• High research and development costs to sales
• Slightly higher advertising costs to sales

Company C is the utility - evidenced by:

• Low advertising expenses to sales
• High long-term debt to equity ratio
• Non applicable inventory turnover
• Higher interest expense to sales