Using ratios to decide between two stock investments

Assume that you are purchasing an investment and have decided to invest in a company in the digital phone business. You have narrowed the choice to Digital Plus Corp. and Red Zone, Inc. and have assembled the following data.

Your strategy is to invest in companies that have low price/earnings ratios but appear to be in good shape financially. Assume that you have analyzed all other factors and that your decision depends on the results of ratio analysis.

Requirements:

1. Compute the following ratios for both companies for the current year:

a. Acid-test ratio

b. Inventory turnover

c. Days 'sales in receivables

d. Debt ratio

e. Earnings per share of common stock

f. Price/earnings ratio

g. Dividend payout

2. Decide which company's stock better fits your investment strategy.

Selected income statement data for the current year: Red Zone Net Sales (all on credit) Cost of Goods Sold Interest Expense Net Income Digital Plus $ 416,830 207.000 o 54,000 $ 497,130 259,000 17.000 76,000 Selected balance sheet and market price data at the end of the current year: Digital Plus Red Zone Current Assets: Cash Short-term Investments Accounts Receivable, Net Merchandise Inventory Prepaid Expenses Total Current Assets Total Assets Total Current Liabilities Total Liabilities Common Stock, $1 par (10,000 shares) $2 par (16,000 shares) Total Stockholders' Equity Market Price per Share of Common Stock Dividends Paid per Common Share $ 24,000 37,000 38,000 65,000 17,000 $ 181.000 $ 263,000 102,000 102,000 10,000 $ 15,000 14,000 46,000 99,000 14,000 $ 188,000 $ 324,000 95,000 132.000 161.000 $ 86.40 $ 1.20 32.000 192,000 $ 104.50 $ 1.00 Selected balance sheet data at the beginning of the current year: Red Zone Digital Plus Balance Sheet: Accounts Receivable, Net Merchandise Inventory Total Assets Common Stock, $1 par (10,000 shares) $2 par (16,000 shares) $ 42,000 81,000 259,000 10,000 $ 51,000 89,000 275,000 32,000