2. Amerbran Company (B)
Amerbran Company was a diversified company that sold various consumer products, including food, tobacco, distilled
products, and personal care products and financial services. Financial statements for the company are shown in Exhibit
1. Using the 20x1 financial statements in Amerbran Company (A), together with the 20x0 income statement shown in
Exhibit 1 below, calculate the ratios listed below for 20x0 and 20x1. Use year-end amounts for ratios that involve
balance sheet data. The company’s interest expense in 20x0 and 20x1 was (in thousands) $105,165 and $102,791,
respectively.
1. Return on assets.
2. Return on equity.
3. Gross margin percentage.
4. Return on sales.
5. Asset turnover.
6. Days’ cash (20x1 only).
7. Days’ receivables.
8. Days’ inventories.
9. Inventory turnover.
10. Current ratio.
11. Acid-test ratio.
12. Debt/capitalization ratio.
13. Times interest earned.
Questions
• Comment on Amerbran’s treatment of excise taxes as part of the calculation
of gross margin.
• As an outside analyst, what questions would you want to ask Amerbran’s
management based on the ratios you have calculated?
6. 4. Return
on Sales
Net Income $378,782
= 0.0576
= 5.76%
$328,773
= 0.0431
= 4.31%
Net Sales Revenue $6,577,480 $7,622,677
5. Asset
Turnover
Sales Revenue $6,577,480
= 1.48
Times
$7,622,677
= 1.58
Times
Total Assets $4,433,448 $4,826,512
6. Days’
Cash
Cash $23,952
= 1.43
Days
$28,912
= 1.47
Days
Cash Expenses /
365
($6,198,698 -
$101,198)/365
($7,293,904 -
$115,974/365
Definition 20x0 20xl
7. 7. Days’
Receivables
Accounts
Receivable
$687,325
= 38.1
Days
$756,152
= 36.2
Days
Sales / 365 $6,577,480/365 $7,622,677/365
8. Days’
Inventories
Inventory $1,225,402
= 173.8
Days
$1,244,912
= 162.1
Days
Cost of sales /
365
$2,573,350/365 $2,803,623/365
9. Inventory
Turnover
Cost of Sales $2,573,350
= 2.10
Times
$2,803,623
= 2.25
Times
Inventory $1,225,402 $1,244,912
Definition 20x0 20xl
8. 10. Current
Ratio
Current Assets $2,013,846
= 1.53
$2,106,116
= 1.30
Current
Liabilities
$1,317,751 $1,625,218
11. Acid-Test
Ratio
Monetary
Current Assets
$711,277
= 0.54
$785,064
= 0.48
Current
Liabilities
$1,317,751 $1,625,218
12. Debt/
Capitalization
Ratio
Noncurrent
Liabilities
$932,828
= 0.2994
=
29.94%
$880,674
= 0.2751
=
27.51%
(Noncurrent
Liabilities
+ Shareholder’s
Equity)
$932,828 +
$2,182,869
$880,674 +
$2,320,620
13. Times
Interest
Earned
Pretax
Operating Profit
+ Interest
$675,659 +
$105,165 = 7.42
times
$603,331 +
$102,791 = 6.87
Times
Interest $105,165 $102,791
Definition 20x0 20xl
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19. ● JCPenney has a higher gross profit margin, which means that they make more gross
profit on each dollar of sales than does Sears. This is very significant since the two
companies are in the same business, and operate in the same way.
● The higher gross profit for JCPenney is also reflected in its higher profit margin and
stronger return on assets and return on equity.
● The JCPenney capital structure includes more debt which gives the company a higher
degree of financial leverage. Their investors receive a higher return on equity but there is
additional risk. JCPenney is paying dividends while Sears is not. The P/E ratio for Sears
is higher than JCPenney suggesting that the market sees better growth prospects for
Sears.
● While EPS for Sears is higher, the stock costs more than twice as much as the stock for
JCPenney.
● JCPenney is the stronger company and probably the better investment.
