Question

Presented below are condensed financial statements adapted from those of two actual companies competing as the primary players in a specialty area of the food manufacturing and distribution industry. ($ in millions, except per share amounts.)

Balance Sheets
	Metropolitan				Republic
Assets
Cash	$	282.3			$	43.1
Accounts receivable (net)		513.7				416.0
Short-term investments		—				8.3
Inventories		562.4				719.2
Prepaid expenses and other current assets		216.6				576.7
Current assets	$	1,575.0			$	1,763.3
Property, plant, and equipment (net)		2,702.2				2,656.5
Intangibles and other assets		297.3				597.9
Total assets	$	4,574.5			$	5,017.7
Liabilities and Shareholders’ Equity
Accounts payable	$	572.9			$	781.2
Short-term notes		312.1				644.4
Accruals and other current liabilities		685.2				620.5
Current liabilities	$	1,570.2			$	2,046.1
Long-term debt		648.6				648.3
Deferred tax liability		474.6				703.7
Other long-term liabilities		215.0				193.1
Total liabilities	$	2,908.4			$	3,591.2
Common stock (par and additional paid-in capital)		229.9				440.0
Retained earnings		2,567.9				1,695.9
Less: Treasury stock		(1,131.7	)			(709.4	)
Total liabilities and shareholders’ equity	$	4,574.5			$	5,017.7
Income Statements
Net sales	$	5,794.0			$	7,856.2
Cost of goods sold		(2,818.0	)			(4,385.7	)
Gross profit	$	2,976.0			$	3,470.5
Operating expenses		(1,649.7	)			(2,933.2	)
Interest expense		(83.8	)			(43.6	)
Income before taxes	$	1,242.5			$	493.7
Tax expense		(295.7	)			(68.1	)
Net income	$	946.8			$	425.6
Net income per share	$	1.6			$	7.7

Evaluate and compare the two companies by responding to the following questions.
Note: Because comparative statements are not provided you should use year-end balances in place of average balances as appropriate.

	Metropolitan		Republic
Return on Assets		%		%
Profit Margin		%		%
Asset Turnover		times		times
Return on Shareholders' Equity		%		%
Equity Multiplier
Acid-Test Ratio
Current Ratio
Receivables Turnover		times		times
Inventory Turnover		times		times
Times Interest Earned		times		times

Of the two companies, which appears riskier in terms of its ability to pay short-term obligations?

Which of the two companies manages their current assets more efficiently?

From the perspective of a creditor, which company offers the most comfortable margin of safety in terms of its ability to pay fixed interest charges?

Answer 1

Metropolitan Republic 45 Return on Assets - Net Income Assets 946.8 425.6 4574.5 47 48 49 50 51 52 53 54 5017.7 20.70% 8.48% Profit Margin- Net Income Net Sales 946.8 425.6 5794 7856.2 16.34% 5.42% 56 57 58 59 60 61 62 63 64 Asset Turnover - Net Sales Assets 5794 4574.5 7856.2 5017.7 1.27 1.57 Return on Shareholder's Equity Net Income Equity 946.8 425.6 1666.1 1426.5 56.83% 29.84%

Equity Multiplier total Assets 5017.7 1426.5 70 71 72 73 74 75 76 4574.5 1666.1 stockholders' Equity 2.75 3.52 Acid -test (Quick) Ratio Current Assets Inventory -Prepaid Expenses Current Liabilities 796 1,570.2 2,046.1 79 0.51 0.23 81 82 83 84 85 Current ratio - Current Assets Current Liabilities 1,575 1,570.2 1,763.3 2,046.1 1.0 0.9 Accounts Receivable Turnover Net Credit Sales Receivables 87 5794 7856.2 416 89 513.7 91 92 93 11.3 18.9 Times Inventory Turnover

Inventory Turnover Cost of Goods Sold Inventory 93 94 95 96 97 98 4385.7 719.2 2818 562.4 5.0 6.1 Times Times interest earned Net Operating Income Interest Expense 537.3 43.6 1326.3 100 101 102 103 104 83.8 15.8 12.3 Times 105 Of the two companies, which appears riskier in terms of its ability to pay short-term obligations? 106 107 108 Republic 109 Which of the two companies manages their current assets more efficiently? 110 Metropolitan 112 113 From the perspective of a creditor, which company offers the most comfortable margin of safety in terms of its ability to pay fixe 114 115 116 Metropolitan