PROBLEM 1

PROFITABILITY RATIOS

I. RETURN ON EQUITY
Elen Company
Net Income 226, 182.00
÷
Average Stockholders' Equity 1,452,060.50
Return on Equity 0.156

Melanie Company
Net Income 22,299.20
÷
Average Stockholders' Equity 677,806.80
Return on Equity 0.033

II. RETURN ON ASSETS

Elen Company
Operating Income 226, 182.00
÷
Average Total Assets 1,825,664.50
Return on Assets 0.124

Melanie Company
Operating Income 22,299.20
÷
Average Total Assets 471,177.30
Return on Assets 0.047

III. GROSS PROFIT MARGIN

Elen Company
Gross Margin 1,030,843.00
÷
Sales 3,407,921.00
Gross Profit Margin 0.302

Melanie Company
Gross Margin 215,683.60
÷
Sales 745,883.60
Gross Profit Margin 0.289

IV. OPERATING PROFIT MARGIN

Elen Company
Operating Income 226, 182.00
÷
Sales 3,407,921.00
Operating Profit Margin 0.066

Melanie Company
Operating Income 22,299.20
÷
Sales 745,883.60
Operating Profit Margin 0.03

V. NET PROFIT MARGIN

Elen Company Operating Income 226, 182.00
÷
Sales 3,407,921.00
Operating Profit Margin 0.066

Melanie Company
Operating Income 22,299.20
÷
Sales 745,883.60
Operating Profit Margin 0.03

CONCLUSION:
One of the primary reasons why stockholders invest in a certain company is the chance of earning points. Investors make use of different
profitability ratios in choosing from diverse investment opportunities available. Careful examination and calculation have been done to
prove who among the two companies are more profitable.
It can be seen that Elen Company has the higher return on equity than Melanie Company. This can be attributed to a higher net income
after tax for the next year and a lower return on equity in the case of Elen Company. On the other hand, the computation shows that
Melanie Company has lower return on assets. The goal is to generate as much as profit based on the available assets. This can be
manifested by the Elen Company. However, for Melanie Company, this can be ascribed to lower profit and higher average total assets. It
means that it is taking more assets to generate the same number of profits for their company. In addition, Elen company shows a bigger
gross profit margin. It means that it was able to generate more sales from the smaller cost of good sold that it has. Comparing the ratio of
the two companies involved, it is evident that Melanie Company has a lower operating profit margin. This means it has lower operating
income and sales. Considering the results of the computation above, we can conclude that Elen Company is more profitable that Melanie
Company.
 PROBLEM 2
OPERATIONAL EFFICIENCY RATIOS

I. TOTAL ASSET TURNOVER

Elen Company
Sales

Average Total Assests

Total Asset Turnover

Melanie Company
Sales

Average Total Assests

Total Asset Turnover

II. ACCOUNTS RECEIVABLE TURNOVER

Elen Company
Sales on Account

Average Accounts Receivable Balance

Accounts Receivable Turnover

Melanie Company
Sales on Account

Average Accounts Receivable Balance

Accounts Receivable Turnover

III. AVERAGE COLLECTION PERIOD

Elen Company
Days

Accounts Receivable Turnover

Average Collection Period

Melanie Company
Days

Accounts Receivable Turnover

Average Collection Period

IV. INVENTORY TURNOVER

Elen Company
Cost of Goods Sold
 Average Inventory Balance
Inventory Turnover

Melanie Company
Cost of Goods Sold

Average Inventory Balance

Inventory Turnover

V. AVERAGE SALE PERIOD

Elen Company
Days

Inventory Turnover
Average Sale Period

Melanie Company
Days

Inventory Turnover
Average Sale Period

VI. OPERATING CYCLE

Elen Company
Average Sale Period

Inventory Turnover
Operating Cycle

Melanie Company
Average Sale Period

Inventory Turnover
Operating Cycle

CONCLUSION:
 The total asset turnover measures the correlation between assets owned by the company and the net
sales being generated by such properties. In the case of the two companies, Elen Company has the
higher asset turnover. This is something positive for them. This can be interpreted to a bigger net sale
generated. The goals of every company are to have a higher Accounts Receivable Turnover Ratio which
can be seen in Melanie Company. This can be attributed a better performance from its collection
department. The average collection period on the other hand, states the usual number of days that it
would take before the company would be able to collect a certain group of receivables. From the
results of the computation, it can be seen that Melanie Company has a shorter average collection
period. It would mean that the collection department has increased its efforts to collect the company’s
receivables as they fall due.
It can be seen in the computation that Elen Company has a lower inventory turnover. This means they
have higher unsold goods that may lead to inventory obsolesce. This would also tie up the company’s
cash resources to its inventory. This scenario is not favorable for their company’s liquidity situation. On
the other hand, Melanie Company has the higher inventory turn over which mean that their Sales
Department was able to push their products more to their customers. When it comes to the average
sale period, Melanie Company got the lower one. This means the cash of their company is not being
tied to its inventory. Lastly, Melanie Company show that they have better operating cycle specifically in
selling their products and collecting receivables compared to Elen Company. In conclusion, although
Elen Company has higher asset turnover, it is not enough reason to consider them as more efficient
one. As what the results shows, Melanie is more efficient rather than Elen Company.
3,407,921.00
÷
1,825,664.50
1.867

745,883.60
÷
471,177.30
1.583

3,407,921.00
÷
347,800.00
9.799

745,883.60
÷
72,109.00
10.344

365
÷
9.799
37.249

365
÷
10.344
35.286

2,377,078.00
÷
250,515.00
9.489

530,200.00
÷
42,117.70
12.589

365
÷
9.489
38.466

365
÷
12.589
28.994

38.466
÷
9.489
4.054

28.994
÷
12.589
2.303
 by the company and the net
nies, Elen Company has the
erpreted to a bigger net sale
eivable Turnover Ratio which
rmance from its collection
usual number of days that it
p of receivables. From the
shorter average collection
orts to collect the company’s
ry turnover. This means they
uld also tie up the company’s
mpany’s liquidity situation. On
which mean that their Sales
hen it comes to the average
f their company is not being
operating cycle specifically in
any. In conclusion, although
ider them as more efficient
than Elen Company.
 PROBLEM 3
FINANCIAL HEALTH RATIOS
I. CURRENT RATIO
Elen Company
2013
Current Assets 96,102.00
÷
Current Liabilities 166,793.00
Current Ratio 0.58

2014
Current Assets 71,715.00
÷
Current Liabilities 143,715.00
Current Ratio 0.50

Melanie Company
2013
Current Assets 49,939.20
÷
Current Liabilities 66,618.20
Current Ratio 0.75

2014
Current Assets 48,774.00
÷
Current Liabilities 77,765.60
Current Ratio 0.63

II. ACID-TEST RATIO

Elen Company
2013
Quick Assets 441,702.00
÷
Current Liabilities 166,793.00
Acid-test Ratio 2.65

2014
Quick Assets 421,715.00
÷
Current Liabilities 143,715.00
Acid-test Ratio 2.93
Melanie Company
2013
Quick Assets 118,482.20
÷
Current Liabilities 66,618.20
Acid-test Ratio 1.78

2014
Quick Assets 124,449.00
÷
Current Liabilities 77,765.60
Acid-test Ratio 1.60

III. WORKING CAPITAL

Elen Company
2013
Current Assets 96,102.00
¯
Current Liabilities 166,793.00
Working Capital -70,691.00

2014
Current Assets 71,715.00
¯
Current Liabilities 143,715.00
Working Capital -72,000.00

Melanie Company
2013
Current Assets 49,939.20
¯
Current Liabilities 66,618.20
Working Capital -16,679.00

2014
Current Assets 48,774.00
¯
Current Liabilities 77,765.60
Working Capital -28,991.60

CONCLUSION:
 The above calculations relates to the financial health of the two
companies. In the current ratio, we can see that Melanie Company
performs better than Elen Company. The acid-test ratio on the contrary,
reveals that Elen performs better than Melanie Company. It means that
Elen have more capability to pay its currently maturing obligation through
its quick assets. Finally, comparing the two companies working capital,
Melanie Company is in better liquidation position than of Elen Company.
This means that they have adequate current assets to pay all of their
current liabilities. Above all, we can still conclude that Melanie Company is
more financially healthy.