Question

Roak Company and Clay Company are similar firms that operate in the same industry. Clay began operations in 2015 and Roak in 2012. In 2017, both companies pay 7% interest on their debt to creditors. The following additional information is available.

	Roak Company			Clay Company
	2017	2016	2015	2017	2016	2015
Total asset turnover	3.1	2.8	3.0	1.7	1.5	1.1
Return on total assets	9.0%	9.6%	8.8%	5.9%	5.6%	5.3%
Profit margin ratio	2.4%	2.5%	2.3%	2.8%	3.0%	2.9%
Sales	\(410,000	\)380,000	\(396,000	\)210,000	\(170,000	\)110,000

Write a half-page report comparing Roak and Clay using the available information. Your analysis should include their ability to use assets efficiently to produce profits. Also comment on their success in employing financial leverage in 2017.

Short answer

In 2017, Roak used financial leverage successfully.In comparison to the 7% interest rate that creditors receive, Clay's return is only 5.9%.

Step-by-step solution

Meaning of Comparative Analysis

When items are compared with one another to find out the differences, then this process of comparison is known as comparative analysis.

Writing a comparative report

COMPARATIVE ANALYSIS REPORT

Based on the data given above, it is concluded that the profit margin of clay is higher than the Roak. However, the turnover ratios of Roak's are remarkably higher than its competitors. Due to this, Roak generates a substantial return on total assets.

Sales growth, an increase in total assets turnover, and an increase in return on total assets are all trends for both businesses. However, Clay is improving at a faster rate than Roak. These variations could result from Roak being a slightly more seasoned business than Clay, who is only three years old. Although Clay's activities are significantly smaller than Roak's, if both businesses keep growing at their current rates, this situation won't last very long.

Since its assets may have been acquired years earlier, Roak's greater overall asset turnover ratios might partly be explained by this. The variations might not be as noticeable if the turnover calculations had been based on current figures. The assets' respective ages could partly explain the disparity in profit margins. Since Clay's assets are presumably more recent, maintenance costs might be lower.

Lastly, Roak used financial leverage effectively in 2017. Compared to the 7% interest rate it pays creditors for financing, its return on total assets is 9.0%. As opposed to the 7% interest rate given to creditors, Clay's return is only 5.9%.