CASE $13$

Comparative Analysis: Credit and Equity Analysis

Two companies competing in the same industry are being evaluated by a bank that can lend money to only one of them. Summary information from the financial statements of the two companies follows:

Page $62$

CHECK

Accounts receivable turnover, Sigma, $13\mathrm{.}5$ times

Required:

a$.$Compute the current ratio, acid$-$test ratio, accounts $($including notes$)$ receivable turnover, inventory turnover, days$$ sales in inventory, and days$$ sales in receivables for both companies. Identify the company that you consider to be the better short$-$term credit risk and explain why.

b$.$Compute the net profit margin, total asset turnover, return on total assets, and return on common stockholders$$ equity for both companies. Assuming that each company paid cash dividends of $$1\mathrm{.}50$ per share and each company$$s stock can be purchased at $$25$ per share, compute their price$-$earnings ratios and dividend yields. Identify which company$$s stock you would recommend as the better investment and explain why.