The following information was provided by Joseph Company as of December 31, Year 2:
On the most recent trading date, Joseph's common shares sold at $36 and the preferred shares sold at $14.The following information on industry averages is provided:Earnings per share $2.06Price-earnings ratio 13.2:1Required:1) Calculate and compare Joseph Company's ratios with the industry averages shown above. Round your answer to two decimal places.2) Discuss whether you would invest in this company.
What will be an ideal response?
Answers will vary
1) Earnings per share = ($528,000 - $8,000 preferred dividends) ÷ 220,000 common shares = $2.36
Price-earnings ratio = $36 ÷ $2.36 = 15.25:1
2) It would be prudent to perform a much more thorough analysis of this company prior to making an investment decision. For example, the above ratios should be computed for more than one year to identify trends in the company's performance. Furthermore, additional ratios should be computed to assess the company's debt-paying ability and managerial effectiveness. Finally, non-quantitative factors would need to be considered (e.g., you may have heard that the company is about to be awarded a major contract.) However, based on this limited information, Joseph outperformed the industry: the earnings per share ratio and the price-earnings ratio for Joseph is above the average for the industry.
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