1. Janet Ludlow is a recently hired analyst. After describing the electric toothbrush industry, her first report focuses on two companies, QuickBrush Company and SmileWhite Corporation, and concludes:

QuickBrush is a more profitable company than SmileWhite, as indicated by the 40% sales growth and substantially higher margins it has produced over the last few years. SmileWhites sales and earnings are growing at a 10% rate and produce much lower margins. We do not think SmileWhite is capable of growing faster than its recent growth rate of 10%, whereas QuickBrush can sustain a 30% long-term growth rate.

1. Criticize Ludlows analysis and conclusion that QuickBrush is more profitable, as defined by return on equity (ROE), than SmileWhite and that it has a higher sustainable growth rate. Use only the information provided in Tables 1 and 2. Support your criticism by calculating and analyzing:

• The five components that determine ROE.
• The two ratios that determine sustainable growth: ROE and plowback.

Table 1: QuickBrush Company financial statements: yearly data ($000 except per-share data)

Table 2: SmileWhite Corporation financial statements: yearly data ($000 except per-share data)

1. Explain how QuickBrush has produced an average annual earnings per share (EPS) growth rate of 40% over the last two years with an ROE that has been declining. Use only the information provided in Table 1.
2. Now assume that you are the banker of both companies. Both companies have applied for a loan of $20 million short-term loan and $30 million long-term loan. Because of liquidity problem you can offer only $50 million loan either of the two companies. Which company do you prefer? Justify your choice by using information contained in the financial statements and calculating relevant ratios.
3. Further assume that you are an independent financial analyst. Identify significant strength and weakness of both companies.