Investment Decision: Goofys / Plutos - Case Study Example

Investment Decision: Goofy’s Pluto’s December 2, of Introduction Currently I’m looking toinvest $5,000 in the common stocks of a company that has the potential to provide equity growth. Common stocks are a profitable investment due to the fact that an investor can obtain capital gains as well dividends payment each year. After searching the market I have narrowed down my selection to two companies that have a lot of potential. The names of the two companies are Goofy’s and Pluto’s. In order to determine which of the two companies is the best investment I will perform a ratio analysis of the firm to compare their financial performance.

Analysis Ratio analysis is a financial analytic tool that is very useful to analyze the performance of an enterprise. A ratio analysis of Goofy’s and Pluto’s which includes the industry standard is illustrated below. Ratio Goofy's Pluto's Industry Gross margin 47.09% 44.35% 46% Net margin 13.54% 12.58% 11% Return on assets (ROA) 11.24% 12.42% 14% Return on equity (ROE) 19.74% 33.71% 30% Asset turnover ratio 0.83 0.99 1.3 Inventory turnover ratio 3.76 2.84 2.5 Current ratio 1.56 1.09 1.75 Quick ratio 1.05 0.43 1.

1 Debt ratio 0.43 0.63 38% Debt to equity ratio 0.76 1.71 0.75 The gross margin is a measure of broad profitability. Goofy’s has a gross margin of 47.09% which is better than Pluto’s by 2.74%. In comparison with the industry standard gross margin of 46% Goofy’s gross margin is better than the industry, while Pluto’s is below the industry standard. The net margin ratio is a measure of the absolute profitability of a company. The net margin of Goofy’s is 13.54% and the net margin of Pluto’s is 12.58%. Both companies have a net margin that is above the industry standard.

The return on assets metric measures how effective a company has been at generating profits from its assets. High ROA is the desirable outcome. The return on assets of Goofy’s is 11.24%. Pluto’s Corporation has a better return on assets than Goofy’s at 12.42%. Goofy’s and Pluto’s have return on assets lower than the industry standard of 14%. Return on equity is a metric that measures how many profits a company has generated in relation to its total equity. The return on equity of Goofy’s is 19.74%. Pluto’s had a much better ROE than Goofy’s at 33.71%. Pluto’s return on equity is higher than the industry standard, but Goofy’s has a ROE that is lower than the industry standard by 10.26%. The asset turnover ratio refers to the amount of sales generated for every dollar worth of assets (Investopedia).

Pluto’s asset turnover ratio is 0.16 higher than Goofy’s. Inventory turnover is a ratio that shows how many times a company’s inventory is sold during an accounting period. The inventory turnover of Goofy’s is 3.76. Pluto has an inventory turnover of 2.84. The current ratio is a financial metric that measures the ability of the company to pay off its short term debt. A current ratio is considered acceptable as long as is above the 1.0 threshold. Goofy’s had a current ratio of 1.56, while Pluto’s current ratio was 1.09. Both companies fell short from the industry standard of 1.75. The quick ratio is a more rigorous metric that measures the liquidity of the firm.

The quick ratio of Goofy’s was 1.05 which is only .05 below the industry standard. Pluto’s quick ratio is a worrisome sign since it is only 0.43. A debt ratio is a metric that compares a company’s total debt to its assets. Both Goofy’s and Pluto have a debt ratio above the industry standard. The debt to equity ratio measures the amount of assets being provided by creditors for each dollar of assets being provided by shareholders (Garrison, Noreen). Lower debt to equity ratio is the most desirable outcome.

Pluto’s has an extremely high debt to equity ratio at 1.71. Goofy’s debt to equity ratio is 0.01 above the industry standard. Decision The financial analysis performed on Pluto’s and Goofy’s had some mixed results. In terms of profitability Goofy’s demonstrated better performance than Pluto’s illustrated by its higher gross and net margin. Pluto’s did a better job of generating profits from its assets and equity. Goofy’s is turning its inventory faster than Pluto’s, but Pluto’s had a superior asset turnover ratio.

The liquidity position of Goofy’s is superior to Pluto’s due to the fact that its current ratio and quick ratio are higher than Pluto’s. The extremely low quick ratio of Pluto is a worrisome sign. The debt position of Goofy’s is lower than Pluto’s. Overall I would invest the $5,000 in common stocks from Goofy’s due to its superior profitability and liquidity among other factors. Work Cited Page Garrison, Ray, and Eric Noreeen. Managerial Accounting (10th ed.). Boston: McGraw-Hill Irwin. 2003. Print.

Investopedia.com. 2012. “Asset Turnover.” 24 November 2012.