Investment Utilization Essay Example

Investment Utilization Essay Profit margin is a good ratio to look at to compare companys profitability in a similar industry. To completely consider return on investment one would need take into account both the companys total investment (assets or liabilities shareholder equity) and its to sales and income. As shown in the above chart, Best Buy and Radio Shack were close in 1999 and 2000, but Radio Shack lost ground in 2001. Circuit City has just been behind the entire period. Best Buy has been involved with many acquisitions and has been aggressively expanding. Best Buy is a clear winner with this type of profit margin in an expansion. Once this stage of expansion is complete shareholders should be pleased with the results (and market share prices). Earnings per share shows how well a company performs on a per share basis. Best Buy has steadily increased its earnings per share probably due to its increasing expansion and even more increasing sales. Circuit City and Radio Shack have been loosing market share from Best Buy and the EPS shows it. The 2001 value would be even higher if the acquisitions were not included. Best Buys stellar EPS performance show why their stock price is much higher than it s competition. The following ratios, Days Receivable, Days Inventory, and Inventory Turnover give investors and idea of how quickly inventory is sold and money for them is collected. The Days Receivable ratio measures the average collection period for goods sold. A low Days Receivable ratio indicates that there is a short period or time between when a customer picks up his or her goods and the time the seller actually receives payment for the sale. A longer Days Receivable period might indicate that a company is subject to higher bad debt risk. In many cases an aging schedule should be created to account for these. For instance we see that Best Buy Days Receivables ratios are short, whereas Radio Shack Circuit City are longer and should be more concerned with bad debt. The other possibility is that Circuit City and Radio Shack have customers who take advantage of paying by credit. Similar to Days Receivable, Days Inventory indicates how many days a company has money tied up in inventory. The shorter the period, the more a company can use the money for other aspects of the business. Both Circuit City and Best Buys Days Inventory are very short compared to Radio Shack. We will write a custom essay sample on Investment Utilization specifically for you for only $16.38 $13.9/page Order now We will write a custom essay sample on Investment Utilization specifically for you FOR ONLY $16.38 $13.9/page Hire Writer We will write a custom essay sample on Investment Utilization specifically for you FOR ONLY $16.38 $13.9/page Hire Writer With both of those indicating that Best Buys Inventory is quickly sold and paid, it is no surprise that Best Buys Inventory Turnover ratio is high. Inventory Turnover measures how fast items move through the company. For Best Buy, the high turnover shows that Best Buy either buys just enough merchandise to sell to customers, or that customers are buying inventory quickly off the shelf. These three ratios indicate that Best Buy is a strong company and the consumer favors them. The current ratio is a measure of a companys ability to pay its short-term debt. Since Best Buy is expanding they have been using more of their liquid funds in that effort. Radio Shacks Current Ratio is high compared to the others. Either they are not investing enough, or plan on pleasing shareholders with large dividends. Best Buys number is very close to 1 (1. 08 to be exact). They should investigate before the company has a negative working capital. Financial Condition The Debt/Equity Ratio (or Debt Ratio) measures how much money a company should safely be able to borrow over long periods of time. This number indicates how much a company is leveraged. Best Buy has a low long-term debit equity ratio and a low current ratio. Together that indicates financial weakness. Of course both Circuit City and Best Buy are in expansion so much of the money is tied up in Liabilities. Radio Shack is in excellent financial condition with the high (probably too high) debt/equity ratio. With Radio Shack having lots of liquidity (as seen from the current ratio) and financial strength it could use the leverage to invest and expand. Once Circuit City and Best Buy slow their expansions, these numbers will rise and with continued success regain financial strength.