Question

Kopi Ltd and Teh Ltd are two companies competing in the same industry Below are the summarized financial statements of the two companies for the year ended 31 December 20X7 Statement of financial position as at 31 December 20X7 Kopi Ltd Teh Ltd Assets Property, plant and equipment, net 522,000547,920 35,100 67,320 16,380 151,992238,500 Cash 61,200 Accounts receivable, net 103,320 12,960 Current notes receivable (trade) Merchandise inventory Prepaid expenses 9,000 12,510 976,410 Total assets 801,792 Liabilities and Equity Current liabilities 110,412 167,940 Long-term notes payable Share capital Retained earnings Total liabilities and equity 145,440 324,000 181,800 370,800 -221.940255,870 976,410 801,7921 Statements of Comprehensive Income (extract) for the year ended 31 December 20X7 Kopi Ltd Teh Ltd Sales 1,386,000 1,584,360 Cost of goods sold Gross proft Distribution expenses Administrative expenses Financial expenses Income tax expenses 955,9981,027,746 430,002 41,220 556,614 48,438 55,962 62,316 23,400 14,220 26,640 43,740 Net profit 291,960 378,720 Basic earnings per share S3.60 S4.09 Additional information for the year ended 31 December 20X6 Kopi Ltd Teh Ltd Accounts receivable, net 53,640 97,560 Current notes receivable (trade) Merchandise inventory 100,080 193,320 Total assets 716,400 688,500 Share capital Retained earnings 324,000 176,940 370,800 168,480 Both companies paid cash dividends of S3.04 per share in 20X7 and each company's share can be purchased at $60 per share currently For both companies, compute: (c) (i) Net profit margin. (ii) Return on total asset. (ii Return on ordinary shareholders' equity. iv) Price-earnings ratios. (v Dividend yield. (9 marks) (d) Which company would you recommend as the better investment? Use the above ratios to analyse and explain why. (3 marks)

Answer 1

(c)

	Kopi ltd	Teh Ltd
1. Net profit margin	Net profit / sales
	21.065	23.904
	291960/1386000*100	378720/1584360*100
2.Return on total assets	Net profit / average total assets
	36.41	38.79
	291960/801792*100	378720/976410*100
3.Retun on Equity	Net profit / shareholder equity
	53.48	60.43
	291960/(324000+221940)*100	378720/(370800+255870)*100
4.Price earning ratio	Price/earning per share
	16.67	14.67
	60/3.6	60/4.09
5.Dividend yield	Dividend paid / stock price
	5.07	5.07
	3.04/60*100	3.04/60*100

(d) From above ratios, Teh ltd return on assets, equity , profit is more compared to Kopi ltd. but PE ratio is more for Kopi.ltd. since all the remaining are more for Teh ltd ,it is better to make investment in Teh ltd.

dividend yield is not deciding factor as it is same for both.