Below are selected ratios for Widget Corporation and Tools Inc. Use this information to answer the following questions.

\begin{array}{c}\begin{array}{ll}\\\text { 1. } & \text { Net operating asset turnover } \\\text { 2. } & \text { Inventory turnover } \\\text { 3. } & \text { Accounts receivable turnover } \\\text { 4. } & \text { Fixed assets turnover } \\\text { 5. } & \text { Net operating profit margin } \\\text { 6. } & \text { Assets-to-equity } \\\text { 7. } & \text { EBIT/revenues } \\\text { 8. } & \text { Gross margin } \\\text { 9. } & \text { Income tax rate }\end{array}\begin{array}{rr}\text { Widget Corp.}&\text { Tools, Inc. }\\2.0 & 2.0 \\4.6 & 4.0 \\12.0 & 12.0 \\1.8 & 2.0 \\4.5 \% & 2.9 \% \\2.10 & 3.3 \\9.9 \% & 8.6 \% \\21.1 \% & 19.8 \% \\35 \% & 35 \% \end{array}\end{array}

a. Which company has a higher return on equity?
b. We know from the residual income method of valuation that, all other things equal, the company with the higher ROCE will have a higher intrinsic value. Why are all other things not likely to be equal in this instance (hint: look at components of ROCE)?
c. Which company has better operating performance (that is, ignoring capital structure).

When Calculating Return on Net Operating Assets Analysts Sometimes Make

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