Below Are Selected Ratios for Widget Corporation and Tools Inc

question 41

Essay

Below are selected ratios for Widget Corporation and Tools Inc. Use this information answer the following questions. $$\begin{array} { | l | l | r | r | r | } \hline & & \text { Year 1 } & \text { Year 2 } & \text { Year 3 } \\\hline \text { 1. } & \text { Net operating asset turnover } & 1.4 & 1.31 & 1.25 \\\hline 2 . & \text { Inventory turnover } & 5.6 & 5.0 & 4.6 \\\hline 3 . & \text { Accounts receivable turnover } & 12.1 & 11.9 & 12.1 \\\hline 4 . & \text { Fixed assets turnover } & 1.3 & 1.29 & 1.29 \\\hline 5 . & \text { Net operating profit margin } & 4.5 \% & 4.6 \% & 4.8 \% \\\hline 6 . & \text { Net operating assets/equity } & 2.10 & 1.98 & 1.77 \\\hline \text { 7. } & \text { EBIT/revenues } & 8.9 \% & 8.6 \% & 8.6 \% \\\hline 8 . & \text { Gross margin } & 20.1 \% & 19.9 \% & 19.8 \% \\\hline 9 . & \text { Income tax rate } & 35 \% & 35 \% & 35 \% \\\hline\end{array}$$
a. We know from the residual income method of valuation that, all other things equal, the company with the higher ROCE will have a higher intrinsic value.
b. Why are all other things not likely to be equal in this instance (hint: look at components of ROCE)?
c. Which company has better operating performance (that is, ignoring capital structure).

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Definitions:

Subsidiary Ledger

A detailed ledger that contains the individual accounts related to a specific main account in the general ledger, used to organize and manage specific types of transactions.

Financial Statement

Reports that convey the financial activities and condition of a business, including the balance sheet, income statement, and cash flow statement.

Normal Balance

The typical side (debit or credit) on which an account increases, based on its classification in the accounting equation.

Account Category

A way to organize various types of accounts in accounting, such as assets, liabilities, equity, revenue, and expenses, based on their nature.