Reference no: EM132452173
Question 1: RATIO ANALYSIS Data for Barry Computer Co. and its industry averages follow. The firm's debt is priced at par, so the market value of its debt equals its book value. Since dollars are in thousands, number of shares are shown in thousands too.
a. Calculate the indicated ratios for Barry.
b. Construct the DuPont equation for both Barry and the industry.
c. Outline Barry's strengths and weaknesses as revealed by your analysis.
d. Suppose Barry had doubled its sales as well as its inventories, accounts receivable, and common equity during 2018. How would that information affect the validity of your ratio analysis? (Hint: Think about averages and the effects of rapid growth on ratios if averages are not used. No calculations are needed.)
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Barry Computer Company: Balance Sheet as of December 31, 2018 (in Thousands)
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Cash
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$ 77,500
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Accounts payable
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$129,000
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Receivables
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336,000
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Other current liabilities
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117,000
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Inventories
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241,500
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Notes payable to bank
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84,000
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Total current assets
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$ 655,000
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Total current liabilities
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$330,000
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Long-term debt
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256,500
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Net fixed assets
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292,500
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Common equity (36,100 shares)
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361,000
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Total assets
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$ 947,500
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Total liabilities and equity
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$947,500
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Barry Computer Company: Income Statement for Year Ended December 31, 2018 (in Thousands)
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Sales
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$1,607,500
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Cost of goods sold
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Materials
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$717,000
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Labor
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453,000
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Heat, light, and power
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68,000
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Indirect labor
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113,000
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Depreciation
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41,500
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1,392,500
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Gross profit
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$ 215,000
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Selling expenses
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115,000
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General and administrative expenses
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30,000
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Earnings before interest and taxes (EBIT)
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$ 70,000
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Interest expense
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24,500
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Earnings before taxes (EBT)
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$ 45,500
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Federal and state income taxes (40%)
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18,200
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Net income
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$ 27,300
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Earnings per share
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$ 0.75623
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Price per share on December 31, 2018
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$ 12.00
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Ratio
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Barry
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Industry Average
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Current
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___
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2.0×
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Quick
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___
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1.3×
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Days sales outstandinga
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___
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35 days
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Inventory turnover
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___
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6.7×
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Total assets turnover
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___
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3.0×
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Profit margin
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___
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1.2%
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ROA
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___
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3.6%
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ROE
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___
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9.0%
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ROIC
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___
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7.5%
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TIE
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___
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3.0×
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Debt/Total capital
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___
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47.0%
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M/B
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___
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4.22
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P/E
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___
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17.86
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EV/EBITDA
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___
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9.14
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aCalculation is based on a 365-day year.
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4-24DuPONT ANALYSIS A firm has been experiencing low profitability in recent years. Perform an analysis of the firm's financial position using the DuPont equation. The firm has no lease payments but has a $2 million sinking fund payment on its debt. The most recent industry average ratios and the firm's financial statements are as follows:
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Industry Average Ratios
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Current ratio
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3×
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Fixed assets turnover
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6×
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Debt-to-capital ratio
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20%
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Total assets turnover
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3×
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Times interest earned
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7×
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Profit margin
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3%
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EBITDA coverage
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9×
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Return on total assets
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9%
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Inventory turnover
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10×
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Return on common equity
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12.86%
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Days sales outstandinga
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24 days
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Return on invested capital
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11.50%
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aCalculation is based on a 365-day year.
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Balance Sheet as of December 31, 2018 (Millions of Dollars)
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Cash and equivalents
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$ 78
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Accounts payable
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$ 45
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Accounts receivable
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66
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Other current liabilities
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11
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Inventories
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159
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Notes payable
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29
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Total current assets
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$303
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Total current liabilities
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$ 85
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Long-term debt
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50
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Total liabilities
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$135
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Gross fixed assets
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225
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Common stock
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114
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Less depreciation
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78
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Retained earnings
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201
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Net fixed assets
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$147
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Total stockholders' equity
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$315
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Total assets
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$450
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Total liabilities and equity
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$450
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Income Statement for Year Ended December 31, 2018 (Millions of Dollars)
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Net sales
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$795.0
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Cost of goods sold
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660.0
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Gross profit
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$135.0
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Selling expenses
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73.5
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EBITDA
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$ 61.5
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Depreciation expense
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12.0
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Earnings before interest and taxes (EBIT)
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$ 49.5
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Interest expense
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4.5
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Earnings before taxes (EBT)
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$ 45.0
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Taxes (40%)
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18.0
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Net income
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$ 27.0
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Question a. Calculate the ratios you think would be useful in this analysis.
Question b. Construct a DuPont equation, and compare the company's ratios to the industry average ratios.
Question c. Do the balance sheet accounts or the income statement figures seem to be primarily responsible for the low profits?
Question d. Which specific accounts seem to be most out of line relative to other firms in the industry?
Question e. If the firm had a pronounced seasonal sales pattern or if it grew rapidly during the year, how might that affect the validity of your ratio analysis? How might you correct for such potential problems?