Question 7.14: A Comparison of Two Companies (1) An analyst collects the in......
A Comparison of Two Companies (1)
An analyst collects the information^{10} shown in Exhibit 16 for two companies
Which of the following choices best describes reasonable conclusions an analyst might make about the companies’ efficiency?
A . Over the past four years, Anson has shown greater improvement in efficiency than Clarence, as indicated by its total asset turnover ratio increasing from 0.84 to 1.11.
B . In FY5, Anson’s DOH of only 4.76 indicated that it was less efficient at inventory management than Clarence, which had DOH of 39.73.
C . In FY5, Clarence’s receivables turnover of 8.35 times indicated that it was more efficient at receivables management than Anson, which had receivables turnover of 10.75.
^{10}Note that ratios are expressed in terms of two decimal places and are rounded. Therefore, expected relationships may not hold perfectly.
| EXHIBIT 16 | |||||
| Anson Industries | Fiscal Year | 5 | 4 | 3 | 2 |
| Inventory turnover | 76.69 | 89.09 | 147.82 | 187.64 | |
| DOH | 4.76 | 4.10 | 2.47 | 1.95 | |
| Receivables turnover | 10.75 | 9.33 | 11.14 | 7.56 | |
| DSO | 33.95 | 39.13 | 32.77 | 48.29 | |
| Accounts payable turnover | 4.62 | 4.36 | 4.84 | 4.22 | |
| Days payable | 78.97 | 83.77 | 75.49 | 86.56 | |
| Cash from operations/Total liabilities | 31.41% | 11.15% | 4.04% | 8.81% | |
| ROE | 5.92% | 1.66% | 1.62% | –0.62% | |
| ROA | 3.70% | 1.05% | 1.05% | –0.39% | |
| Net profit margin (Net income/Revenue) | 3.33% | 1.11% | 1.13% | –0.47% | |
| Total asset turnover (Revenue/Average assets) | 1.11 | 0.95 | 0.93 | 0.84 | |
| Leverage (Average assets/Average equity) | 1.60 | 1.58 | 1.54 | 1.60 | |
| Clarence Corporation | Fiscal Year | 5 | 4 | 3 | 2 |
| Inventory turnover | 9.19 | 9.08 | 7.52 | 14.84 | |
| DOH | 39.73 | 40.20 | 48.51 | 24.59 | |
| Receivables turnover | 8.35 | 7.01 | 6.09 | 5.16 | |
| DSO | 43.73 | 52.03 | 59.92 | 70.79 | |
| Accounts payable turnover | 6.47 | 6.61 | 7.66 | 6.52 | |
| Days payable | 56.44 | 55.22 | 47.64 | 56.00 | |
| Cash from operations/Total liabilities | 13.19% | 16.39% | 15.80% | 11.79% | |
| ROE | 9.28% | 6.82% | –3.63% | –6.75% | |
| ROA | 4.64% | 3.48% | –1.76% | –3.23% | |
| Net profit margin (Net income/Revenue) | 4.38% | 3.48% | –1.60% | –2.34% | |
| Total asset turnover (Revenue/Average assets) | 1.06 | 1.00 | 1.1 | 1.38 | |
| Leverage (Average assets/Average equity) | 2.00 | 1.96 | 2.06 | 2.09 | |
A is correct. Over the past four years, Anson has shown greater improvement in efficiency than Clarence, as indicated by its total asset turnover ratio increasing from 0.84 to 1.11. Over the same period of time, Clarence’s total asset turnover ratio has declined from 1.38 to 1.06. Choices B and C are incorrect because DOH and receivables turnover are misinterpreted.