The gross profit percentage is high for both companies. Smokey, which has a higher sales figure in absolute terms, also has a higher gross profit percentage. It is possible that its marginally greater sales volume enables it to take advantage of discounts. As the two companies operate in the same market, it is possibly geographical location that makes the difference in the profit margin Smokey can make.
The picture is different when it comes to net profit percentage. At 21.5%, that of Binky is significantly higher than that of Smokey (15.4%). The main reason for this is that expenses in all categories are higher for Smokey. In addition, Smokey is paying loan interest, while Binky does not have any loans.
The asset turnover ratios show that Binky is making more efficient use of assets than Smokey, as it is generating proportionally more sales from the assets. As discussed below, the inefficiency of Smokey may be partly because working capital is tied up in inventory.
The current ratios of both companies are greater than one, with Smokey having the edge slightly. These ratios indicate that the companies have sufficient current assets to meet their current liabilities.
However, the quick ratios are more worrying.
Both companies have quick ratios of less than one, indicating potential liquidity problems. In the case of Smokey, the quick ratio is very low at 0.3:1. Much of Smokey Ltd's working capital is tied up in inventory, and the high inventory level suggests that inventory is not selling. Smokey, with its low cash balance and lack of liquidity, may have problems paying debts as they fall due.
The receivables collection period is high for both companies, but for Smokey, at 89.8 days it is considerably higher than that of Binky, which has 59.1 days. Smokey Ltd needs to pay attention to credit control. The longer a debt remains unpaid, the less likely it is to be paid.
In conclusion, although Smokey has a higher profit margin, it has liquidity problems, is less efficient and has ineffective credit control. Binky is therefore a better investment prospect.
