Inventory Turnover Ratios Paper

Questions:

2. Why would the inventory turnover ratio be more important for someone analyzing a grocery store chain than an insurance company? Inventory turnover would be more important for someone analyzing a grocery store than an insurance company, because a large amount of inventory is required for grocery stores, whereas an insurance company really has no tangible inventory that it must turnover.

5. How does inflation distort analysis comparisons for one company over time (trend analysis) and for different companies that are being compared? Are only balance sheet items or both balance sheet and income statements affected? Inflation can lead to an increase in earnings, even if there is no increase in the quantity sold, since the price

If a firm’s ROE is low and management wants to improve it, explain how using more debt might help. According to the DuPont equation, ROE can also be expressed as the profit margin, multiplied by total asset turnover, multiplied by the equity multiplier. Here, the equity multiplier is simply total assets divided by total common equity. Thus, using more debt would decrease total common equity, thereby increasing the equity multiplier. And, if the equity multiplier increases, then ROE as a whole will increase as desired.

10. Refer to an online finance source such as Yahoo! Finance of Google finance to look up the P/E ratios for Verizon Communications and Walmart. Which company has the higher P/E ratio? What factors could explain this? Verizon Communications – 12.83 Walmart – 19.11 Walmart’s P/E ratio is higher than that of Verizon Communications. The P/E ratio shows how much investors are willing to pay per dollar of reported profits. The higher the P/E ratio, the stronger the firm’s growth prospects and lower the risk. Therefore, it seems logical that Walmart’s P/E ratio is higher because it is a well-established company that has been around for many years, whereas Verizon, even though also well-established has a little more associated risk due to its narrow field with a number of serious