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 Best Digital Electronics or Zone Network Electronics and have assembled the following data.
Selected income statement data for the current year follows:
| Income Statement | ||
| Best Digital | Zone Network | |
| Net sales (all on credit) | $467,200 | $569,400 |
| Cost of goods sold | $203,000 | $242,000 |
| Interest expense | $0 | $19,500 |
| Net income | $72,800 | $95,400 |
Selected balance sheet data at the beginning of the current year follow:
| Balance Sheet | ||
| Best Digital | Zone Network | |
| Current receivables, net | $45,060 | $53,780 |
| Inventories | $73,000 | $73,000 |
| Total assets | $262,000 | $274,000 |
| Common stock | ||
| $1 par (13,000 shares) | $13,000 | |
| $1 par (18,000 shares) | $18,000 | |
Selected balance sheet and market price data at the end of the current year follow:
| Best Digital | Zone Network | |
| Current assets | ||
| Cash | $ 27,000 | $ 18,000 |
| Short-term investments | $ 38,520 | $ 15,400 |
| Current receivables, net | $37,500 | $ 44,500 |
| Inventories | $ 72,000 | $ 103,000 |
| Prepaid expenses | $ 4,980 | $ 6,100 |
| Total current assets | $180,000 | $ 187,000 |
| Total assets | $300,000 | $ 325,000 |
| Total current liabilities | $102,000 | $95,000 |
| Total liabilities | $102,000 | $ 143,000 |
| Common stock | ||
| $1 par (13,000 shares) | $ 13,000 | |
| $1 par (18,000 shares) | $ 18,000 | |
| Total stockholders’ equity | $198,000 | $ 182,000 |
| Market price per share of common stock | $ 98.00 | $ 100.70 |
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.
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.
- Acid-test ratio
- Inventory turnover
- Days’ sales in average receivables
- Debt ratio
- Gross profit percentage
- Earnings per share of common stock
- Price/earnings ratio
Please use the library for your research. Do not use sites such as Wikipedia or Investopedia as your sources. If you use a website, make sure you review APA guidelines as to how to properly format websites as a source. Minimum word requirement: 400; include a cover page and a separate reference page listing your sources in proper APA style. Minimum 2 sources; your textbook can be one of your sources.