methoa tuset following ratios and financial information have been compiled for t
ID: 2789914 • Letter: M
Question
methoa tuset following ratios and financial information have been compiled for these two. The for the most recent year: 5.8. ABC Company and XYZ Company are competitors in the manufacturing indus panies ABC XYZ Financial ratios Liquidity Current (times) Quick (times) Cash flow liquidity (times) Cash flow from operations (in millions of s) Activity Accounts receivable turnover (times) Inventory turnover (times) Payables turnover (times) Fixed asset turnover (times) Total asset turnover (times) Leverage Debt ratio (%) Times interest earned (times) Cash interest coverage (times) Cash flow adequacy (times) Profitability Gross profit margin (%) Operating profit margin (%) Net profit margin (%) Cash flow margin (%) Return on assets (%) Return on equity (%) Cash return on assets (%) Earnings per share Closing stock price 0.92 0.61 0.35 995 1.51 1.20 0.85 2,520 5.48 4.75 2.82 2.49 1.10 6.20 4.00 3.55 3.62 1.10 76.02 12.31 9.89 0.43 51.21 17.28 30.19 1.35 43.08 16.23 11.26 6.98 43.11 8.84 4.80 12.59 4.63 10.23 12.54 1.19 $35 per share 40.86 6.87 4.59 $41 per shareExplanation / Answer
a. The liquidity ratios of XYZ are much higher than that of ABC. Liquidity ratios describe the ability of a firm to pay off short-term debt obligations with cash on hand or short-term assets.
But if we look at the inventory turnover and payables turnover ratios, the ratios for ABC are better. Higher inventory turnover ratio for ABC signifies it is able to churn its inventory well and it is thus saving on inventory as well as storage costs. Also, the payables turnover for ABC is higher than XYZ, which signifies that ABC has better bargaining power with its suppliers and can hold off on its payables for longer.
The debt ratios for ABC are higher than XYZ, which means ABC has higher amount of debt for a given amount of equity. The interest coverage ratio for ABC is substantially lower than XYZ, so a lender would be willing to lend to XYZ than ABC.
When we see the margins, though the gross margins for both the companies are almost same, the operating margins for ABC are almost double that of XYZ. This signifies better management of operating expenses and higher operating efficiency of ABC. Also as ABC is highly levered, increase in operating margins magnified to the net margins which are almost three times that of XYZ.
b. Price/Earnings ratio of ABC= 41/4.59= 8.93
Price/Earnings ratio of XYZ= 35/1.19= 29.41
P.E ratio (Price to earning ratio) is one of the widely used and common stock valuation tool. It is a ratio of a company’s current market share price compared to its annual earnings per share. It generally reveals the sentiment of the investors. If the ratio is high, then it means that investors are optimistic and are expecting higher earning growth in the future and if P/E multiple is lower, then vice-versa.
Though the earnings for ABC are higher than XYZ, but it is highly levered. Investors are wary of the high levels of the debt in the company and are thus valuing the company lower inspite of high operating efficiency. XYZ on the hand has optimal amount of debt and seems like a safe investment. Thus the high P/E ratio.
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