TASK: Financial Statement Analysis

A Co. and B Co. are competitors in a particular manufacturing sector. An extract of financial statements for each company is as follows:

Use them in a ratio analysis that compares the companys financial leverage and profitability.

(a) Calculate the following debt and coverage ratios for the two companies. Discuss briefly their financial risk and ability to cover the costs in relation to each other.

i. Debt ratio.

ii. Times interest earned ratio.

(b) Calculate the following profitability ratios for the two companies. Discuss briefly their profitability relative to each other.

i. Operating profit margin.

ii . Net profit margin.

iii. Return on total assets.

iv. Return on common equity.

(c) In what way has the larger debt of B Co. made it more profitable than A Co.? What are the risks that B Co.s investors undertake when they choose to purchase its stock instead of A Co.s?

(d) While ratio analysis can provide some useful information concerning a companys operations and financial condition, it does have limitations. Discuss briefly.

A Co. Item Total assets Total equity (all common) Total debt Annual interest Total sales EBIT Earnings available for common stockholders B Co. $10,000,000$10,000,000 5,000,000 5,000,000 500,000 25,000,000 6,250,000 9,000,000 1,000,000 100,000 25,000,000 6,250,000 3,690,000 3,450,000