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Comparison of financial reports of the companies

The financial position of company A is stronger than that of company B. The total assets of company A at the end of 2011 amounted to $1,176,027,002 while for company A totaled $238,968. Similarly, revenue for company A was greater than that of company B. In 2011, company A had a net income amounting to $164,668,228 while the net income of company B amounted to 53,291. On the face of it, it can be seen that the financial performance for company A is greater than that of company B. Ratio analysis may reveal contrary results. DuPont analysis will be carried out to compare the financial position of the company. The analysis focuses on the return on assets and returns on equity of a company. Return on assets shows how effectively a firm uses assets to generate sales (Siddiqui 2005; Holmes & Sugden 2008). It is a ratio of net income to total assets. Return on equity measures how effectively the management of the organization uses the shareholders equity to generate revenue (Vance 2003). DuPont analysis of the two companies is shown in the tables below.

Company A

2010 2011
Return on asset 13.73% 14.00%
Return on equity 15.41% 16.03%

Company B

2010 2011
Return on asset 19.40% 22.30%
Return on equity 57.27% 42.02%

Even though the net income reveals that the profitability of company A is greater than that of company B, the profitability ratios give a contrary result. The return on assets for company B is greater than that of company A. Return on assets for both companies increased from 2010 to 2011. Also, the return on equity for company B is greater than for company A for the two-year period. However, the return on equity for company A increased from 2010 to 2011 while that of company B declined. Based on the ratios, it is evident that company B is more efficient in using assets and equity to generate net income than company A (Collier 2009; Fraser 2009; Haber 2004). Therefore, it is more profitable.

The table below shows vertical analysis report for company A

Balance sheet

2010 2011
ASSETS
CURRENT ASSETS:
Cash and cash equivalents 34.74% 30.44%
Short-term investments 8.62% 5.17%
Accounts receivable 9.53% 9.38%
Inventories 10.04% 16.05%
Prepaid expenses and other 2.40% 2.92%
Total current assets 65.35% 63.96%
PLANT AND EQUIPMENT:
Land, buildings and improvements 12.03% 11.08%
Machinery and equipment 35.16% 35.32%
Construction-in-progress 1.33% 4.95%
48.52% 51.35%
Less-Accumulated depreciation and (28.06%) (27.32%)
20.45% 24.02%
OTHER ASSETS:
Long-term investments 12.87% 10.89%
Patents and other assets, net 1.32% 1.10%
14.19% 12.00%
100% 100%
LIABILITIES AND SHAREHOLDERS INVESTMENT
CURRENT LIABILITIES:
Accounts payable 4.01% 5.56%
Accrued liabilities:
Salaries, wages and vacation 0.57% 0.55%
Royalties 0.49% 0.57%
Dividends declared 1.56% 1.47%
Other 0.54% 0.39%
Total current liabilities 7.18% 8.56%
DEFERRED INCOME TAXES 3.69% 4.09%
SHAREHOLDERS INVESTMENT:
Preferred stock, no par value, 5,000,000 shares authorized; none issued or outstanding
Common stock, par value $.06 per share; 200,000,000 shares authorized; 144,069,563 shares 0.85% 0.73%
issued and outstanding in 2011 and 142,292,127 shares issued and outstanding in 2010
Additional paid-in capital 34.69% 33.60%
Retained earnings 51.34% 51.92%
Accumulated other comprehensive income:
Unrealized gain on investments 2.16% 0.88%
Cumulative translation adjustment 0.06% 0.18%
Total shareholders investment 89.11% 87.34%
100% 100%

Income statement

2009 2010 2011
Net sales $ 100% $ 100% $ 100%
Cost of goods sold 67% 64% 65%
Gross profit 33% 36% 35%
OPERATING EXPENSES:
Engineering, research and development 9% 8% 8%
Selling, general and administrative 7% 5% 5%
Total operating expenses 15% 13% 13%
Income from operations 17% 23% 23%
OTHER INCOME (EXPENSE)
Investment income 1% 0% 0%
Impairment loss on available-for-sale securities (0)  
Other, net (0%) 1% 1%
Total other income (expense) 0% 2% 1%
Income before provision for income taxes 18% 25% 24%
Provision for income taxes 6% 8% 8%
Net income 12% 17% 16%

The table below shows vertical analysis report for company B

Balance sheet

2010 2011
ASSETS
Current assets
Cash and cash equivalents 8.26% 8.25%
Trade accounts receivable, net of allowance for doubtful accounts of $4,615 in 2011 and $4,708 in 2010 26.09% 26.32%
Prepaid expenses and other current assets 4.94% 2.99%
Deferred tax assets 2.08% 2.68%
Total current assets 41.36% 40.23%
Equity and other investments 8.02% 6.24%
Property and equipment, net 30.68% 29.57%
Goodwill, net 16.97% 19.01%
Other intangibles, net 2.74% 4.40%
Other noncurrent assets 0.23% 0.55%
Total assets 100.00% 100.00%
Liabilities and Stockholders Equity
Current liabilities
Accounts payable 4.37% 4.41%
Accrued expenses and other current liabilities 12.07% 13.51%
Current portion of long-term debt 23.12% 
Deferred revenue 15.91% 15.52%
Total current liabilities 55.47% 33.43%
Noncurrent deferred tax liabilities 1.18% 0.54%
Other noncurrent liabilities 9.48% 12.96%
Total liabilities 66.13% 46.93%
Commitments and contingencies  
Stockholders equity  
Preferred stock, $100.00 par value, 750 shares authorized, no shares issued
Common stock, $0.50 par value,500,000 shares authorized, 32,338 shares issued as of December 31,2011,and 2010 7.05% 6.77%
Retained earnings 32.36% 53.89%
Common stock held in treasury, 5,048 shares in 2011 and 5,285 shares in 2010 (1.15%) (1.06%)
Accumulated other comprehensive loss (4.39%) (6.53%)
Total stockholders equity 33.87% 53.07%
Total liabilities and stockholders equity 100.00% 100.00%

Income statement

2009 2010 2011
Revenue $ 100% $ 100% $ 100%
Costs and expenses
Cost of revenue 51% 54% 52%
Selling, general and administrative 21% 19% 19%
Research and development 11% 10% 9%
Restructuring and reorganization 3%  
Total costs and expenses 86% 83% 80%
Operating income 14% 17% 20%
Equity in net income of affiliate 2% 2% 2%
Impairment of investment   (1)
Income before interest and income tax expense 16% 18% 21%
Interest income 0% 0% 0%
Interest expense 0% 0% 0%
Income before income tax expense 16% 18% 21%
Income tax expense 5% 7% 8%
Net income 11% 11% 13%

Summary

DuPont analysis reveals that Company B is more profitable and efficient in managing assets and equity than company B. This can be attributed to the fact that company A has a high ratio of total to equity total assets of 87.33% in 2011. The company has a low ratio of total liabilities to total assets of 12.65% as of 2011. For company B, the ratio of total equity to total assets amounts to 56.93% in 2011 while the ratio of total liabilities to total assets was 46.07% in 2011. From the comparison, it is evident that company B has higher leverage than company A. This implies that the amount of net income from company B is distributed to a large number of shareholders than in company A thus yielding a high return on assets and return on equity (Brigham & Joel 2009; Eugene & Michael 2009). It is worth noting that the net profit margin for company A (16%) is greater than that of company B (13%). The gross profit margin for company A (35%) is greater than that of company B (48%). This reveals that company A is efficient in managing operating costs while company B is efficient in managing the cost of sales (McLaney & Atrill 2008; Atrill 2009).

References

Atrill, P 2009, Financial management for decision-makers, Financial Times Prentice Hall, Harlow.

Brigham, F & Joel, F 2009, Fundamentals of financial management, South-Western Cengage Learning, USA.

Collier, P 2009, Accounting for managers, John Wiley & Sons Ltd, London.

Eugene, F & Michael, C 2009, Financial management theory and practice, South-Western Cengage Learning, USA.

Fraser, G 2009, Decision accounting, Basil Blackwell Ltd, Oxford.

Haber, R 2004, Accounting dimistified, American Management Association, New York.

Holmes, G & Sugden, 2008, Interpreting company reports, Financial Times/Prentice Hall, Harlow.

McLaney, E & Atrill, P 2008, Financial accounting for decision-makers, Prentice Hall Europe, Harlow.

Siddiqui, A 2005, Managerial economics and financial analysis, New Age International (P) Limited, New Delhi.

Vance, D 2003, Financial analysis and decision making: Tools and techniques to solve, McGraw-Hill books, United States.

Appendix

Common Sized balanced sheets and income statements

Company A

2010 2010 2011 2011
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 348,349,773 34.74% $ 357,986,774 30.44%
Short-term investments 86,447,596 8.62% 60,808,237 5.17%
Accounts receivable 95,647,612 9.53% 110,389,715 9.38%
Inventories 100,728,730 10.04% 188,753,312 16.05%
Prepaid expenses and other 24,095,563 2.40% 34,354,946 2.92%
Total current assets 655,269,274 65.35% 752,292,984 63.96%
PLANT AND EQUIPMENT:
Land, buildings and improvements 120,578,714 12.02% 130,290,789 11.08%
Machinery and equipment 352,618,391 35.16% 415,394,183 35.32%
Construction-in-progress 13,351,954 1.33% 58,244,561 4.95%
486,549,059 48.52% 603,929,533 51.35%
Less-Accumulated depreciation and (281,441,303) (28.06%) (321,387,945) (27.32%)
205,107,756 20.45% 282,541,588 24.02%
OTHER ASSETS:
Long-term investments 129,091,167 12.87% 128,168,165 10.89%
Patents and other assets, net 13,222,442 1.318% 13,024,265 1.10%
142,313,609 14.19% 141,192,430 12.00%
$ 1,002,690,639 100% $ 1,176,027,002 100%
LIABILITIES AND SHAREHOLDERS INVESTMENT
CURRENT LIABILITIES:
Accounts payable $ 40,295,464 4.01% $ 65,470,573 5.56%
Accrued liabilities:
Salaries, wages and vacation 5,724,818 0.57% 6,558,638 0.55%
Royalties 4,988,132 0.49% 6,745,877 0.57%
Dividends declared 15,652,134 1.56% 17,288,348 1.470063865
Other 5,428,081 0.54% 4,631,064 0.39%
Total current liabilities 72,088,629 7.18% 100,694,500 8.56%
DEFERRED INCOME TAXES 37,071,184 3.69% 48,213,981 4.09%
SHAREHOLDERS INVESTMENT:
Preferred stock, no par value, 5,000,000 shares authorized; none issued or outstanding  
Common stock, par value $.06 per share; 200,000,000 shares authorized; 144,069,563 shares 8,537,528 0.85% 8,644,174 0.73%
issued and outstanding in 2011 and 142,292,127 shares issued and outstanding in 2010 0
Additional paid-in capital 347,834,218 34.69% 395,229,891 33.60%
Retained earnings 514,842,177 51.34% 610,702,253 51.92%
Accumulated other comprehensive income:
Unrealized gain on investments 21,750,000 2.16% 10,412,246 0.88%
Cumulative translation adjustment 566,903 0.06% 2,129,957 0.18%
Total shareholders investment 893,530,826 89.11% 1,027,118,521 87.34%
$ 1,002,690,639 100% $ 1,176,027,002 100%

Income statement

2009 2009 2010 2010 2011 2011
Net sales $ 544,522,993 100% $ 816,263,414 100% $ 1,023,762,049 100%
Cost of goods sold 366,968,216 67 520,573,101 64 662,181,714 65%
Gross profit 177,554,777 33% 295,690,313 36% 361,580,335 35%
OPERATING EXPENSES:
Engineering, research and development 47,128,086 9% 64,100,411 8% 81,634,158 8%
Selling, general and administrative 35,807,622 7% 40,617,833 5% 48,578,252 5%
Total operating expenses 82,935,708 15% 104,718,244 13% 130,212,410 13%
Income from operations 94,619,069 17% 190,972,069 23% 231,367,925 23%
OTHER INCOME (EXPENSE)
Investment income 3,321,853 1% 2,901,956 0% 4,165,809 0%
Impairment loss on available-for-sale securities (1,290,590) (0)    
Other, net (298,029) (0%) 9,565,989 1% 8,898,077 1%
Total other income (expense) 1,733,234 0% 12,467,945 2% 13,063,886 1%
Income before provision for income taxes 96,352,303 18% 203,440,014 25% 244,431,811 24%
Provision For Income Taxes 31,715,218 6% 65,706,045 8% 79,763,583 8%
NET INCOME 64,637,085 12% 137,733,969 17% $ 164,668,228 16%

The table below shows vertical analysis report for company B

Balance sheet

2010 2010 2011 2011
ASSETS
Current assets
Cash and cash equivalents $ 18,925 8.26% $ 19,715 8.25%
Trade accounts receivable, net of allowance for doubtful accounts of $4,615 in 2011 and $4,708 in 2010 59,808 26.09% 62,886 26.32%
Prepaid expenses and other current assets 11,332 4.94% 7,141 2.99%
Deferred tax assets 4,758 2.08% 6,398 2.68%
Total current assets 94,823 41.36% 96,140 40.23%
Equity and other investments 18,385 8.02% 14,913 6.24%
Property and equipment, net 70,332 30.68% 70,651 29.57%
Goodwill, net 38,895 16.97% 45,430 19.01%
Other intangibles, net 6,272 2.74% 10,526 4.40%
Other noncurrent assets 534 0.23% 1,308 0.55%
Total assets 229,241 100.00% 238,968 100.00%
Liabilities and Stockholders Equity
Current liabilities
Accounts payable $ 10,007 4.37% $ 10,534 4.41%
Accrued expenses and other current liabilities 27,670 12.07% 32,276 13.51%
Current portion of long-term debt 53,000 23.12%  
Deferred revenue 36,479 15.91% 37,080 15.52%
Total current liabilities 127,156 55.47% 79,890 33.43%
Noncurrent deferred tax liabilities 2,695 1.18% 1,302 0.54%
Other noncurrent liabilities 21,739 9.48% 30,960 12.96%
Total liabilities 151,590 66.13% 112,152 46.93%
Commitments and contingencies    
Stockholders equity  
Preferred stock, $100.00 par value, 750 shares authorized, no shares issued  
Common stock, $0.50 par value,500,000 shares authorized, 32,338 shares issued as of December 31,2011,and 2010 16,169 7.05% 16,169 6.77%
Retained earnings 74,184 32.36% 128,772 53.89%
Common stock held in treasury, 5,048 shares in 2011 and 5,285 shares in 2010 (2,642) (1.15%) (2,524%) (1.06%)
Accumulated other comprehensive loss (10,060) (4.39%) (15,601%) (6.53%)
Total stockholders equity 77,651 33.87% 126,816 53.07%
Total liabilities and stockholders equity $ 229,241 100.00% $ 238,968 100.00%

Income statement

2009 2009 2010 2010 2011 2011
Revenue $ 384,952 $ 100% $ 395,379 $ 100% $ 422,310 $ 100%
Costs and expenses
Cost of revenue 196,269 51% 215,329 54% 220,381 52%
Selling, general and administrative 81,866 21% 75,255 19% 78,407 19%
Research and development 42,008 11% 39,145 10% 38,416 9%
Restructuring and reorganization 9,968 3%    
Total costs and expenses 330,111 86% 329,729 83% 337,204 80%
Operating income 54,841 14% 65,650 17% 85,106 20%
Equity in net income of affiliate 7,637 2% 7,092 2% 7,255 2%
Impairment of investment     (3,477) (1)
Income before interest and income tax expense 62,478 16% 72,742 18% 88,884 21%
Interest income 49 0% 14 0% 27 0%
Interest expense 1,395 0% 984 0% 564 0%
Income before income tax expense 61,132 16% 71,772 18% 88,347 21%
Income tax expense 18,972 5% 27,294 7% 35,056 8%
Net income 42,160 11% 44,478 11% 53,291 13%

The table below shows horizontal analysis report for company A

Balance sheet

2010 2010 2011 2011
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 348,349,773 100% $ 357,986,774 102.76%
Short-term investments 86,447,596 100% 60,808,237 70.34%
Accounts receiveable 95,647,612 100% 110,389,715 115.41%
Inventories 100,728,730 100% 188,753,312 187.38%
Prepaid expenses and other 24,095,563 100% 34,354,946 142.57%
Total current assets 655,269,274 100% 752,292,984 114.80%
PLANT AND EQUIPMENT:
Land, buildings and improvements 120,578,714 100% 130,290,789 108.05%
Machinery and equipment 352,618,391 100% 415,394,183 117.80%
Construction-in-progress 13,351,954 100% 58,244,561 436.22%
486,549,059 100% 603,929,533 124.12%
Less-Accumulated depreciation and (281,441,303) 100% (321,387,945) 114.19%
205,107,756 100% 282,541,588 137.75%
OTHER ASSETS:
Long-term investments 129,091,167 100% 128,168,165 99.28%
Patents and other assets, net 13,222,442 100% 13,024,265 98.50%
142,313,609 100% 141,192,430 99.21%
$ 1,002,690,639 100% $ 1,176,027,002 117.28%
LIABILITIES

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