Question

Titanic Company has net income of $50,000,000. Rowboat Company has net income of $50,000.

Do you think Titanic Company performed better than Rowboat Company?

• What if Titanic Company has total assets of $1 billion and Rowboat Company has total assets of $250,000?
• Is it appropriate to compare companies of different sizes?
• Wouldn’t you expect a national or international company to generate higher net income than a small, local business?
• So how can you compare two companies when they are not the same size?

Answer 1

ROA	Net Income / Total Asset
Titanic Company
Net Income $		5,00,00,000
Total Asset $		1,00,00,00,000
ROA		5.00%
RowBoat Company
Net Income $		50,000
Total Asset $		2,50,000
ROA		20%

Titanic company has net Income of $ 50,000,000 , where as Rowboat company has Net Income of $ 50,000 . As per above data , it sis quite clear that Titanic compay is quite big in operation as compared with Rowboat Company . its is quite natural that titanic company already spread their business across Geography , where Rowboat is not International level base company .

From Asset size point of view , Titanic having total asset value of $ 1bilion and Rowboat having $250,000 .

While comparative purpose , we need to find out both companies ROA position .

In a situation where both companies are not in same size , in that scenario , we used to do multiple standard Ratio analysis which will help us to understand position of the company

On the basis of ROA analysis , we noticed that Rowboat may be in small size company but company is doing excellent in ROA . Company is giving 20% return on Asset mean Asset are properly and economically utilized to generate return , where as Titanic is giant company but they are not giving good ROA .Company is giving less than 10% ROA mean , company asset are not utilised properly to generate maximize return .

We need to see couple of Ratio analysis make it easier to compare Different companies , companies under different size :

Most important ratio to understand any type of companies would b Net Profit Margin ratio , Working capital management position , free cash flow position mainly Solvency analysis and trend review

Other than solvency ratio, debt to leverage ( debt ot Equity and Debt to asset ratio) also important to judge

   We need to review and analysis of Valuation base of different size of company , major valuation base would be :

1. Price Earning ratio
2. Price to Free cash flow ratio
3. Price to earning Growth ( PEG) ratio

Investor need to review revenue growth pattern of both companies . But ths is also true that ONLY revenue growth is not the benchmark to do comparison .Most of the case company generate revenue but excessive cost ( or cost overrun ) eaten up excess revenue and company ended with loss at bottom line ( net profit level) ., So one of the important ratio to compare would be “ Net profit margin ratio “