Subject: Global Financial Statement Analysis

Presented below are condensed financial statements adapted from those of two actual companies competing as the primary players in a specialty area of the food manufacturing and distribution industry. ($ in millions, except per share amounts.)

Balance Sheets
	Metropolitan		Republic
Assets
Cash	$	274.3		$	43.0
Accounts receivable (net)		507.7			407.0
Short-term investments					8.2
Inventories		555.4			711.2
Prepaid expenses and other current assets		207.6			571.7
Current assets	$	1,545.0		$	1,741.1
Property, plant, and equipment (net)		2,698.2			2,612.6
Intangibles and other assets		288.3			588.0
Total assets	$	4,531.5		$	4,941.8
Liabilities and Shareholders' Equity
Accounts payable	$	564.9		$	778.2
Short-term notes		304.1			635.4
Accruals and other current liabilities		678.2			616.5
Current liabilities	$	1,547.2		$	2,030.1
Long-term debt		639.6			640.3
Deferred tax liability		466.6			698.7
Other long-term liabilities		207.0			187.1
Total liabilities	$	2,860.4		$	3,556.2
Common stock (par and additional paid-in capital)		223.9			433.0
Retained earnings		2,560.9			1,692.9
Less: Treasury stock		(1,113.7)			(740.3)
Total liabilities and shareholders' equity	$	4,531.5		$	4,941.8
Income Statements
Net sales	$	5,787.0		$	7,850.2
Cost of goods sold		(2,825.0)			(4,395.7)
Gross profit	$	2,962.0		$	3,454.5
Operating expenses		(1,653.7)			(2,738.2)
Interest expense		(81.8)			(48.6)
Income before taxes	$	1,226.5		$	667.7
Tax expense		(299.7)			(99.1)
Net income	$	926.8		$	568.6
Net income per share	$	1.5		$	7.6

Evaluate and compare the two companies by responding to the following questions. Note:Because comparative statements are not provided you should use year-end balances in place of average balances as appropriate. Required:

1. For both companies, compute the ratios listed below
2. Evaluate and compare the two companies in the space provided

	Metropolitan	Republic
Return on Assets		%		%
Profit Margin		%		%
Asset Turnover		times		times
Return on Shareholders' Equity		%		%
Equity Multiplier
Acid-Test Ratio
Current Ratio
Receivables Turnover		times		times
Inventory Turnover		times		times
Times Interest Earned		times		times

Analysis:

1. Which of the two firms had greater earnings relative to resources available?
2. Have the two companies achieved their respective rates of return on assets with similar combinations of profit margin and turnover?
3. From the perspective of a common shareholder, which of the two firms provided a greater rate of return?
4. Which company has made the most effective use of financial leverage?
5. Of the two companies, which appears riskier in terms of its ability to pay short-term obligations?
6. Which of the two companies manages their current assets more efficiently?
7. From the perspective of a creditor, which company offers the most comfortable margin of safety in terms of its ability to pay fixed interest charges?