Question: Using ratios to decide between two stock investments
Assume that you are purchasing an investment and have decided to invest in a company in the digital phone business. You have narrowed the choice to All Digital Corp. and Green Zone, Inc. and have assembled the following data.
Selected income statement data for the current year:
| All digital | Green Zone |
Net sales revenue (all on credit) | \(417,925 | \)493,115 |
Cost of goods sold | 209,000 | 258,000 |
Interest expenses | 0 | 14,000 |
Net income | 58,000 | 72,000 |
Selected balance sheet and market price data at the end of the current year:
| All digital | Green Zone |
Current assets: | | |
Cash | \(23,000 | \)18,000 |
Short-term investment | 37,000 | 17,000 |
Accounts receivables, Net | 39,000 | 49,000 |
Merchandise inventory | 64,000 | 102,000 |
Prepaid expenses | 21,000 | 17,000 |
Total current assets | \(184,000 | \)203,000 |
Total assets | \(263,000 | \)326,000 |
Total current liabilities | 105,000 | 99,000 |
Total liabilities | 105,000 | 134,000 |
Common stock: | | |
\(1 par (10,000 shares) | 10,000 | |
\)2 par (14,000 shares) | | 28,000 |
Total stockholder’s equity | 158,000 | 192,000 |
Market price per share of common stock | 92.80 | 128.50 |
Dividend paid per common share | 1.20 | 0.90 |
Selected balance sheet data at the beginning of the current year:
| All digital | Green Zone |
Balance sheet: | | |
Accounts receivables, Net | \(41,000 | \)54,000 |
Merchandise inventory | 81,000 | 89,000 |
Total assets | 258,000 | 277,000 |
Common stock: | | |
\(1 par (10,000 shares) | 10,000 | |
\)2 par (14,000 shares) | | 28,000 |
Your strategy is to invest in companies with low price/earnings ratios but in good financial shape. Assume that you have analyzed all other factors and that your decision depends on the results of ratio analysis.
Requirements
1. Compute the following ratios for both companies for the current year:
a. Acid-test ratio
b. Inventory turnover
c. Days’ sales in receivables
d. Debt ratio
e. Earnings per share of common stock
f. Price/earnings ratio
g. Dividend payout
2. Decide which company’s stock better fits your investment strategy
