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# Comparing Balance Sheets

Jethro is a never-married 65 year-old U.S. citizen living in Los Angeles with no dependents (not even pets). He retired on June 20, 2007 after 40 years as a kindergarten teacher in the Los Angeles City Unified School District. He owns his own home, and has no debt other than the monthly balance on his credit card which he pays off every month as soon as he gets the bill.

As a retired teacher, he gets medical and dental insurance coverage for life. He also gets a monthly retirement check, which will increase with inflation. This check completely covers his normal living expenses.

Aside from this, he currently gets no other income - and has no other investments -- except that while teaching, he also put money aside every month into a large mutual fund which invests in companies traded on the New York Stock Exchange. The current balance in this account is \$500,000.

He has decided to withdraw \$100,000 from this account, and invest it himself. This is will be the first time he has every purchased shares on his own. He has decided to invest all of it in the shares of one company. That company will be either Pacific Sunwear or American Eagle Outfitters. He wants our advice on which one of these two companies he should invest in.

Compare the balance sheets from both companies to decide who Jethro should invest in (please be detailed and near 1 page

#### Solution Preview

In order to decide which company should Jethro invest in, we need to make a comparison of some of the basic financial ratios. Let's start with the current ratio since is a test of a company's financial strength and calculates how many dollars in assets are likely to be converted to cash within one year in order to pay debts that come due during the same year. Current ratio is calculated by dividing the total current assets by the total current liabilities. A healthy ratio should be 1.0 or greater for liquidity. If the current ratio is below 1.0, the ability to pay bills is impaired. If it is greater than 1.0, there is a possibility that assets are not being used ...

#### Solution Summary

Jethro is a never-married 65 year-old U.S. citizen living in Los Angeles with no dependents (not even pets). He retired on June 20, 2007 after 40 years as a kindergarten teacher in the Los Angeles City Unified School District. He owns his own home, and has no debt other than the monthly balance on his credit card which he pays off every month as soon as he gets the bill.

\$2.19