Ratio Analysis

Class Example:
Aggressive Limited and Conservative Limited are in the same line of business and are direct
competitors in a large metropolitan area. Both have been in business approximately 10 years,
and each has had steady growth. The management of each has a different viewpoint in many
respects. Conservative Limited is more conservative, and as its Managing Director said, “We
avoid what we consider to be undue risk.” Neither company is publicly held.
The 2008 financial statements for Aggressive Limited and Conservative Limited are

Statement of Financial Position Aggressive Ltd Conservative Ltd

Kshs'000 Kshs'000
Assets
Cash 35,000 22,000
Accounts Receivable 40,000 30,000
Inventory 100,000 40,000
Intangible assets 85,000 308,000
Property plant and equipment 140,000 400,000
Total Assets 400,000 800,000

Liabilities and Equity

Accounts payable 100,000 50,000
Long-term debt (10%) 60,000 70,000
Share capital (Par value Ksh 10) 150,000 500,000
Share premium 30,000 110,000
Retained earnings 60,000 70,000
Total Liabilities and Equity 400,000 800,000
 Ksh.000 Ksh.000
Statement of comprehensive income
1
Sales revenue ( /3 on credit) 450,000 810,000
Cost of goods sold -245,000 -405,000
Expenses (including interest and income tax -160,000 -315,000
Net income 45,000 90,000

Selected data from the 2007 statements Ksh.000 Ksh.000

Accounts receivable (net) 20,000 38,000
Inventory 92,000 45,000
Long-term debt 60,000 70,000

Other information:

Aggressive Ltd Conservative Ltd

Per share price at end of 2008 (offering price) 18 15
Average income tax rate 30% 30%
Dividends paid in 2008 (Sh) 36,000,000 15,000,000

Required

An investor has the opportunity to buy 10 per cent of the shares in one or the other
company at the per share prices given and has decided to invest in one of the
companies.
Based on the data given, prepare a comparative written evaluation of ratio analyses
(and any other available information) and give your recommended choice.