Question

Given the financial statements for Jones Corporation and Smith Corporation shown here:

b. In which one would you buy stock? Why?

JONES CORPORATION
Current assets		Liabilities
Cash	\(20,000	Accounts payable	\)100,000
Accounts receivable	80,000	Bonds payable (long term)	80,000
Inventory	50,000
Long Term Assets		Stockholder’s Equity
Fixeed assets	\(500,000	Common Stock	\)150,000
Less: Accumulated Depreciation	(150,000)	Paid in capital	70,000
Net fixed assets*	350,000	Retained earnings	100,000
Total assets	\(500,000	Total Liab. And equity	\)500,000

JONES CORPORATION
Sales (on credit)	\(1,250,000
Cost of goods sold	750,000
Gross profit	\)500,000
Selling and administrative expenses	257,000
Less: depreciation expenses	50,000
Operating profits	\(193,000
Interest expenses	8,000
Earning before taxes	\)185,000
Tax expenses	92,500
Net income	\(92,500

*Use net fixed assets in computing fixed asset turnover.

†Includes \)7,000 in lease payments.

SMITH CORPORATION
Current assets		Liabilities
Cash	\(35,000	Accounts payable	\)75,000
Marketable securities	7,500	Bonds payable (long term)	210,000
Accounts receivable	70,000
Inventory	75,000
Long term assets		Stockholder’s equity
Fixed assets	\(500,000	Common stock	\)75,000
Less: accumulated depreciation	250,000	Paid in capital	30,000
Net fixed assets*	250,000	Retained earnings	47,500
Total assets	\(437,500	Total liab. And equity	\)437,500

*use net fixed assets in computing fixed assets turnover.

SMITH CORPORATION
Sales (on credit)	\(1,000,000
Cost of goods sold	600,000
Gross profit	\)400,000
Selling and administrative expenses	224,000
Less: depreciation expenses	50,000
Operating profits	\(126,000
Interest expenses	21,000
Earning before taxes	\)105,000
Tax expenses	52,500
Net income	\(52,500

Includes \)7,000 in lease payments

Short answer

The shareholders are more concerned with the profitability ratios. Jones corporation has much better ratio than the smith corporation. Hence, the share of jones corporation is recommended for buying.

Step-by-step solution

Comparison of the ratios

	Jones corporation	Smith corporation
Profit margin	7.40%	5.25%
Return on assets	18.50%	12%
Return on equity	28.91%	34.4%
Receivable turnover ratio	15.63 times	14.29 times
Average collection period	23.35 days	25.54 days
Inventory turnover	25 times	13.3 times
Fixed assets turnover	3.57 times	4 times
Total assets turnover ratio	2.5 times	2.29 times
Current ratio	1.5 times	2.5 times
Quick ratio	1.0 times	1.5 times
Debt to total assets	16%	48%
Times interest earned	30.37 times	8.38 times
Fixed charge coverage ratio	13.33 times	4.75 times

Explanation for selecting Jones corporation

The profitability ratios of the Jones corporation is better than Smith corporation. The return on equity of Smith corporation is better than Jones corporation, it is so because it has taken more financial risk. But in term of other ratios, Jones corporation is better than the Smith corporation. Hence, Jones corporation’s share is recommended to buy.