The information below is excerpted from the financial statements of two companie
ID: 418331 • Letter: T
Question
The information below is excerpted from the financial statements of two companies. Use this information to answer the questions
(in $ million)
Company A
Company B
Net revenues
117958
41296
Net income
3526
1188
Total current assets
18672.5
29564.5
Total assets
42494
37433
Total current liabilities
12708.5
15370
Total liabilities
24671
32030
Total stockholders’ equity
17823
5403.5
Footnote: Approximately 98% of Company B’s account receivables are from unpaid balances carried by customers using the store credit card
1. Is one company significantly more profitable than the other? Justify using appropriate ratio(s).
2. Which company creates higher value for its shareholders? Explain using appropriate ratio(s). (Stockholder equity can be used as a proxy for shareholders)
(in $ million)
Company A
Company B
Net revenues
117958
41296
Net income
3526
1188
Total current assets
18672.5
29564.5
Total assets
42494
37433
Total current liabilities
12708.5
15370
Total liabilities
24671
32030
Total stockholders’ equity
17823
5403.5
Explanation / Answer
Solution:
1. Calculating Profit Margin for both the companies:
Profit Margin = Net Income/Net revenue
For Company A: Profit Margin = 3526/117958 = 2.98%
For Company B: Profit Margin = 1188/41296 = 2.87%
As profit margin for Company A > Profit Margin of company B, Company A is more profitable.
2) Calculating Return on Shareholder's equity for both the companies:
Return on Shareholder's equity = Net Income/Shareholder's equity
For Company A, Return on Shareholder's equity = 3526/17823 = 19.78%
For Company B, Return on Shareholder's equity = 1188/5403.5 = 21.98%
As Return on Shareholder's equity for company B is more than that of company A. So, Company B creates higher value for its shareholders.
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