ATC 8-4 Business Applications Case Performing Ratio Analysis Using Real-World Data
American Greetings Corporation manufactures and sells greeting cards and related items such as gift wrapping paper. CSX Corporation is one of the largest railway networks in the nation. The following data were taken from one of the companies’ February 29, 2016, annual report and from the other’s December 30, 2016, annual report. Revealing which data relate to which company was intentionally omitted. For one company, the dollar amounts are in thousands, while for the other they are in millions.
| Company 1 | Company 2 | |
|---|---|---|
| Sales | $1,900,790 | $11,069 |
| Depreciation costs | 50,303 | 1,301 |
| Net earnings | 129,842 | 1,714 |
| Current assets | 559,868 | 2,487 |
| Property, plant, and equipment | 467,710 | 31,150 |
| Total assets | 1,603,449 | 35,414 |
Required:
a. Calculate depreciation costs as a percentage of sales for each company.
b. Calculate property, plant, and equipment as a percentage of total assets for each company.
c. Based on the information now available to you, decide which data relate to which company. Explain the rationale for your decision.
d. Which company appears to be using its assets most efficiently? Explain your answer.
ATC 8-5 Business Applications Case Performing Ratio Analysis Using Real-World Data
Companies in the gas and oil business use a lot of property, plant, and equipment. Not only is there the significant investment they must make in equipment used to find, extract, and process the oil and natural gas, but they must also purchase the rights to the energy reserves themselves.
- Chesapeake Energy Corporation: "We own interests in approximately 22,700 oil and natural gas wells. . . . Our daily production for 2016 averaged 635 mboe, . . .” One "mboe" is the energy equivalent to that in 1,000 barrels of oil.
- Anadarko Petroleum Corporation: "Anadarko Petroleum Corporation is among the world’s largest independent exploration and production companies, with approximately 1.7 billion BOE of proved reserves at December 31, 2016.” One "BOE" is equivalent to the energy contained in one barrel of oil.
The following information was taken from the companies’ December 31, 2016, annual reports. All dollar amounts are in millions.
| Chesapeake Energy | Anadarko Petroleum | |
|---|---|---|
| Sales | $7,872 | $7,869 |
| Depreciation and depletion costs | 1,107 | 4,301 |
| Property, plant, and equipment (net of accumulated depreciation) | 10,609 | 32,168 |
| Total assets | 13,028 | 45,564 |
| Depreciation method | Straight-line | Straight-line |
| Depletion method | Units of production | Units of production |
| Estimated life of assets | ||
| Buildings | 10 to 39 years | up to 40 years |
| Machinery and equipment | 3 to 20 years | 3 to 15 years |
| Net income | $(4,401) | $(3,071) |
Required:
a. Calculate depreciation costs as a percentage of sales for each company.
b. Calculate property, plant, and equipment as a percentage of total assets for each company.
c. Based only on the percentages calculated in Requirements a and b, which company appears to be using its assets most efficiently? Explain your answer.
d. Calculate the return-on-assets ratio for each company. Based on this ratio, which company appears to be using its assets most efficiently? Explain your answer.
e. Identify some of the problems a financial analyst would encounter in comparing the use of long-term assets at Chesapeake versus Anadarko.
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