Question

Your friend has $5000 to invest in the stockmarket and is deciding between an investment in Ability Ltd or Absolute Ltd. In the most recent reporting period, Absolute Ltd made a profit after tax of $1 000 000, compared to Ability’s after-tax profit of $500 000. On this basis, your friend believes Absolute Ltd is the superior investment. Discuss your friend’s investment choice. In doing so, suggest other financial data that should be considered. Identify the non-financial data may be of interest to inform your friend’s investment decision.

Answer 1

Answer)

Although profit that the company earned is one of the important the factors that the investor must consider,I suggest my friend to see the other factors also.

He must look at the profits of both the companies for past years also to find whether the profits are increasing or decreasing for past few years. He must see whether there is any legal suit on the company where there will be any probability for outflow of huge amount of cash like patent issues to see whether they may have any negative impact on future profit after tax.

Then he must consider ratios like

1)Return on investment that which company is yeilding the better return on investment.

2)Earning per share to see which company has better EPs.

3)Return on assets to see which company have better returns on assets.

4)Profit margin ratios to see which company have better profit margin.

5)Asset turnover ratio to to evaluate the performance of the company.

Other non financial data to be considered while investing is considering the employee turnover ratios and reasons for high employees turnover if any,lost or replacement of key employees and reasons,Corporate social responsibility, ethics that the company follows,amount of carbon or other greenhouse gases released and so on