The following data present key ratios for six well-known U.S.

corporations: Apple, Boeing,

Citigroup, Facebook, McDonald’s, and Walmart. However, the companies are not listed in order,
and their names have been removed from the column headings. Using only your understanding of
the ratios and the nature of each company listed, match each of the sets of ratios with the
appropriate company.

   A  B  C  D  E  F
136.8
Return on equity (%) 17.23 0 19.70 6.64 45.43 36.90

Return on assets (%) 6.85 5.31 17.82 0.77 12.54 14.93

19.5
Profit margin (%) 2.81 5.17 36.86 2 17.82 21.19

Gross margin (%) 25.65 14.57 86.29 NA 38.52 39.08

12.5
Price to earnings (X) 17.15 22.51 38.08 9 26.00 18.24

Asset turnover (X) 2.44 1.03 0.48 0.04 0.71 0.70

Collection period (days) 4.30 30.49 43.24 NA 20.55 27.59

181.3
Inventory turnover (X) 8.26 1.79 NA NA 5 58.64
109.1
Debt to equity (X) 1.56 5 0.10 6.96 3.40 1.51

Times interest earned (X) 9.66 19.20 NA 1.64 8.76 43.15

Current ratio (X) 0.86 1.25 11.97 0.37 1.39 1.35

Acid test (X) 0.19 0.38 11.63 0.37 0.78 1.22

(NA = Not applicable)

12. A = Walmart. The low profit margin is characteristic of supermarkets or discount retailers. The
collection period is low because as a retailer Walmart does not offer credit terms to its customers.
Also, the large difference between the current ratio and the acid test is indicative of the large
amounts of inventory that Walmart carries.

B = Boeing. The biggest giveaway is that the inventory turnover is very low, indicative of Boeing’s
long production process and relatively infrequent sales.

C = Facebook. The high price-to-earnings ratio is characteristic of a company that hasn’t reached
its potential on profits but for which investors have high expectations. Also, the current ratio and
the acid test are almost the same (and inventory turnover is not applicable), reflecting the fact that
Facebook has little or no inventory.

D = Citigroup. The high debt ratio and low times interest earned are characteristic of financial
firms. Also, as a financial firm, some of the typical ratios are not applicable.

E = McDonald’s. The very high inventory turnover is the clearest indicator of a fast-food
restaurant. You can’t leave that food sitting around for too long.

F = Apple. There isn’t one clear giveaway here, but the high profit margin is indicative of Apple’s
premium product, and the high inventory turnover reflects the high demand for Apple’s products.
 Answer the following questions based on the information in the table. The tax rate is 40 percent
and all dollars are in millions. For simplicity, assume that the companies have no other liabilities
other than the debt shown next.

  Atlantic Corp. Pacific Corp.

Earnings before interest and taxes $450 $   470

Debt (at 8% interest) $290 $1,490

Equity $910 $   370

a. Calculate each company’s ROE, ROA, and ROIC.

b. Why is Pacific’s ROE so much higher than Atlantic’s? Does this mean Pacific is a better
company? Why or why not?

c. Why is Atlantic’s ROA higher than Pacific’s? What does this tell you about the two
companies?

d. How do the two companies’ ROICs compare? What does this suggest about the two
companies?

SOLUTIONS:

a.  
Atlantic Corp. Pacific Corp.
ROE 28.1% 56.9%
ROA 21.3% 11.3%
ROI
C 22.5% 15.2%

b. Pacific’s higher ROE is a natural reflection of its higher financial leverage. It does not mean
that Pacific is the better company.

c. This is also due to Pacific’s higher leverage. ROA penalizes levered companies by comparing
the net income available to equity to the capital provided by owners and creditors. It does not
mean that Pacific is a worse company than Atlantic.

d. ROIC abstracts from differences in leverage to provide a direct comparison of the earning
power of the two companies’ assets. On this metric, Atlantic is the superior performer, although
both percentages are quite attractive. Before drawing any firm conclusions, however, it is
important to ask how the business risks faced by the companies compare and whether the
observed ratios reflect long-run capabilities or transitory events.
 5. Selected financial data for Amberjack Corporation follows.

  ($ thousands)
  Year
  Year 1  2 
Sales 271,161    457,977 
Cost of goods sold 249,181    341,204 
Net income (155,034)   (403,509)
Cash flow from operations (58,405)   (20,437)
 
Cash 341,180    268,872 
Marketable securities 341,762     36,900 
Accounts receivable 21,011   35,298 
Inventories   6,473  72,106 
Total current assets 710,427   413,176 
 
Accounts payable 28,908   22,758 
Accrued liabilities 44,310 124,851 
Total current liabilities 73,218 147,610 

a. Calculate the current and quick ratio at the end of each year. How has the company’s short-
term liquidity changed over this period?

b. Assuming a 365-day year for all calculations, compute the following:

i. The collection period each year based on sales.
ii. The inventory turnover and the payables period each year based on cost of goods
sold.
iii. The gross margin and profit margin each year.

c. What do these calculations suggest about the company’s performance?

5.
a.  
Year 1 Year 2
Current
ratio 9.70 2.80

Quick ratio 9.61 2.31

b. Amberjack’s short-run liquidity has deteriorated considerably, but from a high initial
base.
c.
d. Year 1 Year 2
Collection period
(days) 28.3  28.1 

Inventory turnover (X) 38.5  4.7 

Payables period (days) 42.3  24.3 

Gross margin 8% 25%

Profit margin −57% −88%
e. The company lost money in both years, more in the second year than the first. Cash
flow from operations is negative in both years—but has improved. Liquidity has fallen and the
inventory turnover is down sharply. The more than 10-fold increase in inventory suggests that
Amberjack was either wildly optimistic about potential sales or completely lost control of its
inventory. A third possibility is that the company is building inventory in anticipation of a major
sales increase next year. In any case, the inventory investment warrants close scrutiny. In
general, these numbers look like those of an unstable, startup operation.