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Judging a Company's Overall Financial Performance

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Ratio company A company B
Return on equity 21.50% 32.30%
Return on assets 16.40% 17.10%
Days sales in receivables 42 36
Inventory turnover 8 6
Gross profit % 51% 53%
Net income as a % 8.30% 7.20%
Time interest earned 9 16

Recommend one company stock over the other. State the reasons for your recommendations.

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Solution Summary

The discussion is 536 words with six sections (executive summary, profitability, productivity, debt capacity, missing data and conclusion) based on judging a company's overall performance.

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Executive Summary
I recommend Company B because they have superior overall profitability, ample debt capacity, and fast collections. All of these measures indicate strength in operations and delivering value on assets and investor capital. Company B sells their inventory a little slower than Company A and their operating expenses as a percent of sales are a little worse than Company A but these are more than offset by the strong measures for overall profitability.

Profitability
There are several profitability measures above. Gross margin, the pricing over product cost, is stronger for Company B. This strength is offset by weaker cost controls, because the Net Income as a % of sales is lower for Company B but not by a wide margin. The most powerful measures of profitability, return on assets and return on equity, the ...

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