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Task 4: Financial Statement Analysis Birds Draft Co. and Dodo Bird Co., are rivals in the manufacture of craft papers. Some financial statement values for
Task 4: Financial Statement Analysis Birds Draft Co. and Dodo Bird Co., are rivals in the manufacture of craft papers. Some financial statement values for each company follow. Use them in a ratio analysis that compares the firms' financial leverage and profitability. Item Total assets Total equity (all common) Total debt Annual interest Total sales EBIT Earnings available for common stockholders3,690,0003 Birds Draft Co. (RM) Dodo Bird Co. (RM) 10,000,000 5,000,000 5,000,000 500,000 25,000,000 6,250,000 450,000 10,000,000 9000,000 ,000,000 100,000 25,000,000 6,250,000 Required Calculate the following debt and coverage ratios for the two companies. Discuss briefly their financial risk and ability to cover the costs in relation to each other. a. i) Debt ratio i) Times interest earned ratio b. Calculate the following profitability ratios for the two companies. Discuss briefly their profitability relative to each other. i) Operating profit margin ii) Net profit margin ii) Return on total assets iv) Return on common equity In what way has the larger debt of Dodo Bird made it more profitable than Birds Draft? What are the risks that Dodo Bird's investors undertake when they choose to purchase its stock instead of Birds Draft's? c. d "While ratio analysis can provide some useful information concerning a company's operations and financial condition, it does have limitations". Discuss briefly
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