CT 14-4: (Static) Analyzing financial ratios

Presented as follows are 12 financial ratios for two companies in separate industries. Ford Motor Company manufactures automobiles and sells them to retail dealers. AutoZone, Incorporated sells automobile parts and car-care products directly to consumers.

Ratio	Ford December 31, 2018	Auto Zone August 27, 2018
Asset turnover	0.6	1.2
Average days to collect receivables	25.5	8.4
Average days to sell Inventory	30.1	274.3
Current ratio	1.20	0.92
Debt to assets	0.86	1.16
Dividend yield as of March 22, 2019	7.0%	n/a(1)
Earnings per share (EPS)	$ 0.93	$ 49.59
Net margin	2.3%	11.9%
Plant assets to long-term debt	0.21	0.84
Price-earnings ratio (P/E) as of March 22, 2019	9.6	18.8
Return on equity	10.3%	n/a(2)
Return on investment	1.4%	14.3%

(1) AutoZone did not pay a dividend.

(2) AutoZone has negative total stockholders' equity, but it has a positive balance in Retained Earnings.

Required:

Write a brief memo addressing the following questions:

1. Determine which company appears to be the most profitable. Explain the reasons for your decision and include any needed discussion of the difficulties of comparing ratios from these two companies.

2. Determine which company appears to be using its assets most efficiently. Explain the reasons for your decision and include any needed discussion of the difficulties of comparing ratios from these two companies.

3. Determine which company appears to have the greater financial risk. Consider both short-term and long-term financial risk. Explain the reasons for your decision and include any needed discussion of the difficulties of comparing ratios from these two companies.

4. Based on these ratios only, which company do you think is the better investment opportunity? Explain the reasons for your decision and include any needed discussion of the difficulties of comparing ratios from these two companies.