Answer
(a) James Co's profitability appears to be significantly higher than Smyth Co. However, only looking at the absolute dollar values to judge profitability could give misleading results since the two companies may have entirely different products and sales volumes. Earnings per share of James Co. is 0.37 as compared to 0.20 for Smyth Co. This could be a sign of effective cost management and control.
(b) Working capital of James is 400K which is significantly lower than 105K for Smyth Co. However, relying on these figures could distort the analysis since a company may operate on even a small amount of working capital. Moreover, a high working capital is a sign of mismanagement of cash flow / liquidity. Despite huge difference in working capital, the current ratio for both companies are nearly same which imply that Smyth Co. is managing its liquidity efficiently as compared to James Co.
(c) Despite having 33.33% debt ratio, the Free cash flow of James Co. is 115,000 which is very high as compared to Smyth Co's Free Cash Flow of 12,000 only although Smyth's debt ratio is about 12% less than James Co., Therefore, even with a smaller debt ratio, Smyth Co's solvency doesn't appear to be satisfactory. On the other hand, debt management of James Co. appear to be much more efficient.
Work Step by Step
(N-1): Net Sales - Cost of Goods Sold - Operating Expenses - Interest expense - Tax Expense = Net Profit
(N-2): Net income (From N-1) / No. of shares outstanding = Earnings per share
(N-3): Current Assets Less Current Liabilities = Working Capital
(N-4): Current Assets / Current Liabilities = Current Ratio
(N-5): Current Liabilities + Long Term Liabilities / Total Assets = Debt Ratio
(N-6): Cash generated from operations less capital expenditure less dividends = Free Cash Flow
