Cross-sectional and time-series comparisons

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Reference no: EM13171852

Solvent Ltd is considering expanding its business and comparing between two potential opportunities for investment in either company X or company Y.

The president of Solvent has asked the controller to prepare a report that summarises the financial aspects of the two potential investees for the last year.

The controller has presented a number of financial ratios that can assist in the identification and interpretation of trends for each investee. The following ratios have been calculated for the year ended 31st December 2012 for each company:

Ratio	Company X	Company Y
Current ratio	2	1.50
Acid-test ratio	1	0.80
Accounts receivable days	50	80
Inventory turnover (times)	8	5
Accounts payable days	90	60
Percent of long-term debt to total assets	30%	40%
Gearing	25%	55%
Gross profit percentage	40%	30%
Operating profit percentage	25%	15%
Return on capital employed	30%	22%
Return on equity	20%	10%
Interest cover (times)	10	6
Earnings per share	1	1.50
Operating cash flow per share	2.10	1.30
Required

a) Write a report to the Board of Directors of Solvent Ltd to analyse the performance of companies X and Y and to give recommendation as which of those two investment opportunities is better. Your report should include comments on as much performance areas as data allow.

b) Discuss and analyse the limitations of ratio analysis for both cross-sectional and time-series comparisons.

Reference no: EM13171852

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