The Koebels have considered the offer extended by Coffee Beans Ltd. (see Chapter 17) and have turned it down.

Instead, Brian, Janet, and Natalie have decided to continue operating Koebel's Family Bakery Ltd. and to expand the business. Koebel's Family Bakery Ltd. has excess cash for the expansion but needs time to organize it. In the meantime, the cash could be invested. The Koebels have been approached by a family friend who works in the investment industry. This family friend has made a strong recommendation to buy shares in Cookies and Cream Ltd., a public company. Because Janet, Brian, and Natalie are familiar with the bakery business, they believe that investing in a public company that operates a bakery could be a good investment. The investment in Cookies and Cream Ltd. could provide a significant return on a short-term basis while the Koebels organize for the expansion.

In order to assess this investment, Natalie has calculated several ratios for both Cookies and Cream Ltd. and Koebel's Family Bakery as follows:

Instructions
(a) Which company is more liquid? Explain.
(b) Which company is more solvent? Explain.
(c) Which company is more profitable? Explain.
(d) Are Cookies and Cream Ltd.'s ratios improving? Explain.
(e) Overall, why do you think that the ratios of Koebel's are stronger than those of Cookies and Cream Ltd.?
(f) What other considerations must the Koebels keep in mind before making an investment in any public company?

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Cookies and Cream Ltd. Cookies and Cream Ltd. Koebel's Family Bakery Ltd. Ratio Year End 2014 Year End 2013 Year End 2014 Current ratio Receivables turnover Inventory turnover Debt to total assets Times interest earned Return on common 1.0:1.0 15.6 times 21.4 times 18.5 times 22.6 times 30% 31 times 8.4:1:0 47.8 times 7.6 times 13% 65 times 61 times shareholders equity Return on total assets Gross profit margin Profit margin Dividend payout Price-earnings ratio 7.8% 5.4% 19.5% 33% 32% 24 times 8.1% 57% 21% 3.9% 98% 19 times 36.9% 32% 753% 22.1% 60% n/a