Company X and Company Y Are in the Same Industry

question 85

Essay

Company X and Company Y are in the same industry and have the following ratios.
$$\begin{array} { l c c c } & \text { Company X } & \text { Company Y } & \text { Industry Average } \\\hline \text { Current ratio } & 1.2 & 0.89 & 1.1 \\\text { Debt/equity } & 0.20 & 0.40 & 0.3 \\\text { Total asset turnover } & 1.9 & 2.1 & 2.5 \\\text { Net profit margin } & 4.2 \% & 3.8 \% & 4.0 \% \\\text { Return on equity } & 12.4 \% & 14.8 \% & 15.0 \% \\\text { Dividend payout ratio } & 25.0 \% & 10.0 \% & 20.0 \% \\\hline\end{array}$$ Discuss the relative natures of the two companies in terms of risk and return. Identify the more growth-oriented firm and justify your selection. Support your discussion and conclusions by referring to the ratios.

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Definitions:

LIFO

"Last In, First Out," an inventory valuation method where the most recently acquired items are the first to be sold, affecting cost of goods sold and inventory valuation.

FIFO

"First In, First Out," an inventory valuation method where goods first added to inventory are the first to be sold or used.

Gross Profit

A company's revenue minus its cost of goods sold, indicating the efficiency of its core operation excluding overhead.

LIFO

"Last In, First Out," an inventory valuation method where the last items added to inventory are the first to be used or sold.