Just based on the summary below, I need a recommendation of which company would be the best to invest in out of ACME and SMITHCO. Please explain in detain why.
The ratio analysis indicates that ACME has increased their profits and decreased their liabilities from 2003 to 2004. ACME has also increased their ability to cover interest payments and increased their return on assets. Overall it appears that ACME has had continuous success and net profitability and is passing this on to their shareholders with dividend re-investment options or dividend payments.
The ratio analysis of SMITHCO shows that the company has had a slight increase in their current liabilities, but at the same time their current assets have increased as well as showing the company is still profitable. However, the total asset turnover shows that SMITHCO may not be re-investing in the company and if it is, it is not in the most efficient manner to increase the wealth of the shareholders. SMITHCO has decreased their debt overall from 2003 to 2004 as well as decreasing their interest bearing liabilities. The profit of SMITHCO has increased in 2004 in addition to the price per share which is good as a shareholder and for the overall growth of the company.
Ratio analysis can also help us to check whether a business is doing better this year than it was last year; and it can tell us if our business is doing better or worse than other businesses doing and selling the same things. In other words it helps in inter firm and intra firm comparison.
We can use ratio analysis to try to tell us whether the business
1. is profitable
2. has enough money to pay its bills
3. could be paying its employees higher wages
4. is paying its share of tax
5. is using its assets efficiently
6. has a gearing problem
7. is a candidate for being bought by another company or investor
Though ratio has its advantage but it has following limitations:
1. Accounting Information
* Different Accounting Policies
The choices of accounting policies may distort inter company comparisons.
* Creative accounting
This analyze the financial performance of two organization and also give the recommendation for investment.