Companies in the coal mining business use a lot of property, plant, and equipment. Not only is there the significant investment they must make in the equipment used to extract and process the coal, but they must also purchase the rights to the coal reserves themselves.
Cloud Peak Energy, Inc., claims to be the third largest coal company in the United States.
Peabody Energy Corporation claims to be the largest private-sector coal company in the world. The following information was taken from these companies€™ December 31, 2010, annual reports. All dollar amounts are in thousands.

*Includes income attributable to noncontrolling interest.

Required
a. Calculate depreciation costs as a percentage of sales for each company.
b. Calculate buildings, machinery, and equipment as a percentage of total assets for each company.
c. Based only on the percentages calculated in parts (a.) and (b.), which company appears to be using its assets most efficiently? Explain your answer.
d. Calculate the return on assets ratios for each company. Based on this ratio, which company appears to be using its assets most efficiently? Explain your answer.
e. Identify some of the problems a financial analyst encounters when trying to compare the use of long-term assets of Cloud Peak versusPeabody.

Transcribed Image Text:

Cloud Peak Energy, Inc. Peabody Energy Corp Sales Depreciation and depletion costs Property, plant, and equipment $1,370,761 100,023 S6,331 300 440,900 (net of accumulated depreciation) Total assets Depreciation method 1,008,337 1,915,107 Straight-line or units of production Units of production 7,426,100 11,363,100 Straight-line Units of production Depletion method Estimated life of assets Buildings Machinery and equipment 5 to 25 years 3 to 20 years $117,197* 10 to 20 years 3 to 33 years Net income S 802,200