ratios requiring net income use net income attributable W r i t i n g

ratios requiring net income use net income attributable W r i t i n g

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Please do not repeat the questions in your answer, but clearly indicate the question you are referring to (e.g. “(1b)”). Limit your response to a maximum of 600 words.

Your boss has provided you with balance sheets and income statements for both Wal-Mart and Amazon. Your job is to compute various ratios on the financial statements and draw some conclusions on what these are telling us when comparing the two companies. Your boss has provided specific ratios and questions that she would like you to address. (For any ratios requiring net income use net income attributable to Walmart as the net income number).

Profitability

  • Compute return on assets for the most recent year and disaggregate the ratio into profit margin and asset turnover (compute all three ratios for both companies). (3pts)
    • Which company is more profitable? (1pt)
    • Based on the disaggregation of ROA into profit margin and asset turnover, what conclusions can we draw regarding the sources of each company’s profitability and how they compare to one another? (Specifically compare the two company’s profit margins and asset turnover ratios) (2pts)
  • Compute gross profit rate for the most recent year for each company. (1pt)
    • Wal-Mart is considering changing suppliers in order to reduce its inventory cost and increase profitability. What effect would this have on profit margin and gross profit rate? (2pts)
  • Compute each company’s inventory turnover and days in inventory ratios for the most recent year. Does Walmart or Amazon sell their inventory more often? What do these ratios tell you about the volume of sales at these retailers? Show all computations. (5pts)
  • Which company has a stronger current ratio for the most recent year? Do you think this ratio is more important to investors or creditors when they are making decisions? Explain why and show all computations. (4pts)
  • Compute each company’s debt to assets ratio for the most recent year. (2pts)
    • Which company has a greater risk of being unable to pay its debts when they come due? (2pts)
    • Is debt financing or equity financing riskier? Why? (1pts)

Liquidity

Solvency

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