Park University Financial Acc

Initial Post

  1. Comparisons of income can be very difficult for two companies even though they sell the same products in equal volume. Why? Explain thoroughly.
  2. Look up the balance sheets and income statements (use the most recent fiscal year) of two companies that you are interested in. Calculate the debt-to-equity ratio, current ratio, net profit margin, and return on equity of both firms. Compare the firms and the results. Which seems to be in a better financial position? Why?

Student 1 

1. Comparisons of income can be very difficult for two companies even though they sell the same products in equal volume. Why? Explain thoroughly.

Comparing two incomes from similar companies can be difficult because the revenue from both companies may not be calculated the same so that leads to inconsistencies when making comparisons. Both companies might use different system as some companies us LIFO while other use FIFO.

2 Look up the balance sheets and income statements (use the most recent fiscal year) of two companies that you are interested in. Calculate the debt-to-equity ratio, current ratio, net profit margin, and return on equity of both firms. Compare the firms and the results. Which seems to be in a better financial position? Why?

Wal-mart

debt to equity ratio 97.01

current ratio 0.79

net profit margin 2.42

return on equity 17.37

Apple

debt to equity ratio 216

current ratio 1.07

net profit margin 25.88

return on equity 147.84

Financially you can see that Apple is a bigger company so the debt to equity is extremely higher but the return on equity makes up for the debt amount.

Student 2

Two companies’ income can be hard to compare even though they sell the same products in equal volume because there are different ways that companies do their financial reporting. “In contrast, accounting earnings are affected by several conventions regarding the valuation of assets such as inventories (e.g. LIFO versus FIFO treatment) …” (Bodie, Kane, & Marcus, 2021). Companies’ can use either FIFO or LIFO to reporting revenue, cost of goods sold and other expenses. The fact that all those are acceptable for companies to use it is difficult to compare them. Here is an example of two competitor in the automobile industry, General Motors and Ford. In their case, General Motors seems to be doing better than Ford. General motors has a better return on equity, debt to equity ratio and net profit ratio. However, it is important to point out that General Motors is a smaller company than Ford. Here are the ratios of both companies.

                                                                                     General Motors                   Ford

Debt to equity ratio                                                1.23                                      2.65

Current ratio                                                            1.08                                      1.20

Net profit ratio                                                         8.50%                                  2.13%

Return on equity                                                      0.26%                                  8.42%

Bodie, Z., Kane, A., & Marcus, A. (2021). Essentials of Investments (12th ed.). McGraw-Hill Education.


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