Financial AccountingSection 5 Ratio Analysis

, IFRS International Financial Reporting Standards

You have recently been hired to advise a client in which of two companies she should invest: Ajax Limited and Comet Limited

Because Comet is Larger than Ajax, your client knows that ratio analysis is a good technique for comparing companies of different sizes. She would like you to answer the questions in the table below, by calculating a ratio that is applicable to her question for each company. You must only use the list of ratios provided and use each ratio only once to answer one question.

Income Statement, Company Ajex, Company Comet

Sales, $30000 (Ajax), $65000 (Comet)

Cost of Goods Sold, $15000 (Ajax), $39000 (Comet)

Operating Expense, $10000 (Ajax), $10700 (Comet)

Interest Expense, $1000 (Ajax), $300 (Comet)

----------------------------------

 Net Income before Taxes, $4000 (Ajax), $15000 (Comet)

Income Taxes, $1000 (Ajax), $5000 (Comet)

----------------------------------

 Net Income, $3000 (Ajax), $10000 (Comet)

Balance Sheet, Ajax, Comet

Cash, $1000 (Ajax), $3000 (Comet)

Marketable securities, $0 (Ajax), $2000 (Comet)

Account Receivable, Net, $4000 (Ajax), $5000 (Comet)

Inventory, $4000 (Ajax), $4000 (Comet)

Property, Plant, Equipment, net, $14000 (Ajax), $36000 (Comet)

-----------------------------------

Total Assets $23000 (Ajax), $50000 (Comet)

 Liabilities

Account Payable, $4000 (Ajax), $8000 (Comet)

Long term debt, $10000 (Ajax), $4000 (Comet)

Common Share (no dividends paid on these), $5000 (Ajax), $30000 (Comet)

Retained Earning, $4000 (Ajax), $8000 (Comet)

----------------------------------

Total Liability $23000 (Ajax), $50000 (Comet)

A. Which company is managing its inventory better? Answer to one decimal place (eg. 21.7)

What ratio should be used to answer this question? Choose one

Asset Turnover? 

Return on Equity? 

Accounts receivable days?

 Inventory days?, 

profit margin?, or 

interest coverage?

What is the calculated ratio of Ajax BLANK ?

What is the calculated ratio of Comet BLANK ?

Which company is better? Ajax or Comet or Neither ? BLANK

B.     Which company is managing its receivables better? Answer to one decimal place (eg. 21.7)

What ratio should be used to answer this question? Choose one

Asset Turnover? 

Return on Equity? 

Accounts receivable days?

 Inventory days?, 

profit margin?, or 

interest coverage?

What is the calculated ratio of Ajax BLANK ?

What is the calculated ratio of Comet BLANK ?

Which company is better? Ajax or Comet or Neither ? BLANK

C.     Which company is managing its assets better? Answer to one decimal place (eg. 21.7)

What ratio should be used to answer this question? Choose one

Asset Turnover? 

Return on Equity? 

Accounts receivable days?

 Inventory days?, 

profit margin?, or 

interest coverage?

What is the calculated ratio of Ajax BLANK ?

What is the calculated ratio of Comet BLANK ?

Which company is better? Ajax or Comet or Neither ? BLANK

D.     Which company is more profitable relative to its sales? Answer to one decimal place (eg. 21.7)

Asset Turnover? 

Return on Equity? 

Accounts receivable days?

 Inventory days?, 

profit margin?, or 

interest coverage?

What is the calculated ratio of Ajax BLANK ?

What is the calculated ratio of Comet BLANK ?

Which company is better? Ajax or Comet or Neither ? BLANK

E.  If interest rates rose, which company would be harmed the most? Answer to one decimal place (eg. 21.7)

Asset Turnover? 

Return on Equity? 

Accounts receivable days?

 Inventory days?, 

profit margin?, or 

interest coverage?

What is the calculated ratio of Ajax BLANK ?

What is the calculated ratio of Comet BLANK ?

Which company is better? Ajax or Comet or Neither ? BLANK

F. Which company is more profitable? Answer to one decimal place (eg. 21.7)

Asset Turnover? 

Return on Equity? 

Accounts receivable days?

 Inventory days?, 

profit margin?, or 

interest coverage?

What is the calculated ratio of Ajax BLANK ?

What is the calculated ratio of Comet BLANK ?

Which company is better? Ajax or Comet or Neither ? BLANK