Individual Comparative Analysis Memo

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Individual Comparative Analysis Memo
Accounting – Annual Report Project
Fall 2009

Annual Report Project
| SJM| Medtronic|
| 2008| 2008|
Profitability Ratios|  |  |
Return on Equity| 12.5%| 17.8%|
Return on Assets| 13.13%| 7.9%|
Earnings per Share| $1.12| $1.94|
Return on Sales| 8.81%| 14.86%|
Gross Margin Percentage| 73.17%| 80.60%|
Solvency Ratios| | |
Current Ratio| 2.02| 2.37|
Working Capital| 1,051,539*| 4,313**|
Quick Ratio| 1.20| 1.52|
Interest Coverage Ratio| 28.93| 90.44|
Activity/Asset Turnover Ratios| | |
Receivable Turnover| N/A| N/A|
Receivable Collection Period| N/A| N/A|
Inventory Turnover| 2.33| 2.67|
Average Days Supply***| 154 days| 135 days|
Capitalization/Leverage Ratios| | |
Debt/Equity| 0.76| 0.50|
Market Ratios| | |
Price/Earnings Ratio| 30.59| 15.24|
*SJM- dollar amounts in thousands
**Medtronic- dollar amounts in millions
***360 days
Comparative Analysis
First off, I am going to rank the companies’ two financial measures, earning power and solvency. The scale ranges from 1 (very weak) to 10 (very strong). After analyzing the numbers of both companies, it is very apparent that Medtronic has generally done better than SJM in the fiscal year 2008, and this applies to both financial measures. For the first measure, earning power, Medtronic has done better than SJM in all ratios, excluding Return on Assets (ROA). Based on this, on a scale from 1 to 10, I would rank Medtronic as an eight and SJM a six. Moving onto the next financial measure, under all solvency ratios, Medtronic had done better than SJM. Once again, Medtronic’s ranking is 8, but SJM seems a little worse, therefore I rank SJM a five. The five ratios that determine the earning power of a company are Return on equity (ROE), Return on assets (ROA), Earnings per share (EPS), Return on Sales (ROS), and Gross Margin (GM). Those five ratios are also known as the profitability ratios. Return on equity measures the effectiveness with which a company manages capital provided by owners, or shareholders. Medtronic’s ROE is 17.8%, while SJM’s is 12.5%. By this, we can tell that Medtronic’s higher percentage tells us that they were more efficient in applying stockholders’ money than SJM. Return on assets measures the effectiveness with which a company manages its shareholders’ and creditors’ investments. Under this ratio, SJM’s is higher than Medtronic, with a percentage of 13.13 versus 7.9%. We can understand from this that SJM has allocated and managed its resources more efficiently than Medtronic. Information on a company’s ability to generate and market profitable products and control its costs is called Return on Sales. Based on the ratios calculated for SJM and Medtronic, Medtronic has the better operating performance of the two firms. The two remaining profitability ratios are Earnings per share (EPS) and Gross Margin (GM). EPS provides a measure of a company’s profitability strictly from a common stock shareholders’ viewpoint. Medtronic’s EPS is $1.94, while SJM’s is $1.12, from these numbers we can tell Medtronic has been more profitable than SJM, though once again, this is strictly from a common stock shareholders’ viewpoint. Finally, Gross Margin measures the extent to which the selling price of sold inventory exceeds its cost. To make it easier to compare, my team and I have calculated GM as a percentage, or Gross Margin Percentage. Medtronic’s percentage is at 80.60, while SJM’s GMP is 73.17%. This tells us that Medtronic’s selling price of a product is 80.60% higher than its cost to produce, while SJM’s is 73.17%. After looking at all the profitability ratios, we can tell that Medtronic’s earning power is stronger than SJM’s. The second financial measure is Solvency. Solvency ratios help assess a company’s ability to meet its debt. The four solvency ratios are Current Ratio (CR), Working Capital (WC), Quick Ratio (QR),...
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