Make an investment decision (Learning Objective 4)
Assume that you are purchasing an investment and have decided to invest in a company in the smartphone business. You have narrowed the choice to Digital Plus Electronics or Speed Network Electronics and have assembled the following data.
Selected income statement data for the current year follow:
Digital Plus | Speed Network | |
Net sales (all on credit) | $401,500 | $554,800 |
Cost of goods sold | $209,000 | $231,000 |
Interest expense | – | $ 16,500 |
Net income | $ 49,000 | $ 63,000 |
Selected balance sheet data at the beginning of the current year follow:
Digital Plus | Speed Network | |
Current receivables, net | $ 34,300 | $ 53,480 |
Inventories | $ 86,000 | $ 77,000 |
Total assets | $258,000 | $276,000 |
Common stock: | ||
$1 par (10,000 shares) | $ 10,000 | |
$1 par (14,000 shares) | $ 14,000 |
Selected balance sheet and market-price data at the end of the current year follow:
Digital Plus | Speed Network | |
Current assets: | ||
Cash | $ 30,500 | $ 22,000 |
Short-term investments | 52,220 | 21,200 |
Current receivables, net | 35,000 | 40,000 |
Inventories | 66,000 | 98,000 |
Prepaid expenses | 2,280 | 6,800 |
Total current assets | $186,000 | $188,000 |
Total assets | $436,000 | $434,375 |
Total current liabilities | $109,000 | $104,000 |
Total liabilities | $109,000 | $139,000 |
Common stock: | ||
$1 par (10,000 shares) | $ 10,000 | |
$1 par (14,000 shares) | $ 14,000 | |
Total stockholders’ equity | $327,000 | $295,375 |
Market price per share of common stock | $ 73,50 | $81,90 |
Your strategy is to invest in companies that have low price/earnings ratios but appear to be in good shape financially. Assume that you have analyzed all other factors and that your decision depends on the results of ratio analysis.
Requirement
Compute the following ratios for both companies for the current year and decide which company’s stock better fits your investment strategy, Assume all sales are on credit.
- a. Acid-test ratio
- b. Inventory turnover
- c. Days’ sales in average receivables
- d. Debt ratio
- e. Gross profit percentage
- f. Earnings per share of common stock
- g. Price/earnings ratio
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Managerial Accounting (5th Edition)
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