A Comparative Analysis of the Profitability of Two
Potential Equity Investments
BUSI 1043 – Introduction to Financial Accounting
Professor: Brent Koritko
Sunday, July 26, 2015
The purpose of this report is to perform a comparative analysis of the profitability of two potential equity investments: Auto Wash Bot Ltd. (AWBL) and Popeye’s Muscle Wash Ltd. (PMWL). AWBL is selling 50% ownership for $100,000 in efforts to pursue expansion in the mobile device industry, and PMWL is selling 100% of its business for $100,000 to pursue retirement. A complete analysis of each company’s income statement will ...view middle of the document...
24). However, operating income is where AWBL falls short as the company is experiencing a growth and expansion phase, which requires more income to be allocated towards research and development, advertising and other expenses.
Conversely, looking at the income statement for PMWL, operating income shows healthy gains of $45,862, which means the operating expenses are significantly lower in comparison to AWBL’s. However, PMWL’s cost of goods sold appear abnormally high, which makes an investor question whether this company is at it’s maturity phase in the product life cycle, and how much additional capital is necessary to bring this figure down to a number that leverages economies of scale and allows for profit maximization.
WHAT PERCENTAGE OF REVENUE ENDS UP AS PROFIT?
Reviewing AWBL’s performance in fiscal year 2015, the percentage of sales revenue that ended up as profit was as follows:
Net Income / Sales Revenue = $4,400 / $375,000 = - 0.0117
This indicates a risk for a potential investor, as there is not enough substantiating information detailing the previous fiscal years’ performances and whether there is a trend of net income or net loss percentage from year to year (Harrison, Horngren, Lemon, & Seguin, 2014, pg. 24).
Alternatively, PMWL’s percentage of revenue ending as profit in fiscal year 2015 was as follows:
Net Income / Sales Revenue = $45,862 / $375,000...