Due Saturday 

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

201

8. 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.)

Barry Computer Company: Balance Sheet as of December 31, 2018 (in Thousands)

Cash

$ 77,

50

0

Accounts payable

$1

29

,000

Receivables

336,000

Other current liabilities

11

7,000

Inventories

2

41,500

Notes payable

to bank

84,000

 

  Total current assets

$ 655,000

   Total current liabilities

$3

30,000

Long-term debt

256,500

Net fixed assets

292,500

Common equity (36,100 shares)

361,000

Total assets

$ 947,500

Total liabilities and equity

$947,500

Barry Computer Company: Income Statement for Year Ended December 31, 2018 (in Thousands)
Sales	$1,607,500
	Cost of goods sold
Materials	$717,000
Labor	453,000
Heat, light, and power	68,000
Indirect labor	113,000
Depreciation	41,500	1,392,500
Gross profit	$ 215,000
	Selling expenses	115,000
General and administrative expenses	30,000
Earnings before interest and taxes (EBIT)	$ 70,000
	Interest expense	24,500
Earnings before taxes (EBT)	$ 45 ,500
Federal and state income taxes (40%)	18,200
	Net income	$ 27,300
Earnings per share	$ 0.75623
Price per share on December 31, 2018	$ 12.0 0

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___

___

___

___

___

___

___

3.0×

___

___

___

___

Ratio

Barry

Industry Average

Current

___

2.0×

Quick

1. 3×

Days sales outstanding a

35 days

Inventory turnover

6. 7×

Total assets turnover

3.0×

Profit margin

1.2%

ROA

3.6%

ROE

9.0%

ROIC

7.5%

TIE

Debt/Total capital

47.0%

M/B

4.22

P/E

17.86

EV/ EBITDA

9.14

a Calculation is based on a 365-day year.

4-24 DuPONT 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:

Total assets turnover

3×

Profit margin

Inventory turnover

Days sales outstanding
a

a
Calculation is based on a 365-day year.

Industry Average Ratios
Current ratio		3×	Fixed assets turnover	6×
Debt-to-capital ratio	20%
Times interest earned	7×	3%
EBITDA coverage	9×	Return on total assets	9%
10×	Return on common equity	12.86%
24 days	Return on invested capital	11.50%

Accounts payable

Other current liabilities

Inventories

   Total current liabilities

Long-term debt

Net fixed assets

Total assets

Total liabilities and equity

$450

Balance Sheet as of December 31, 2018 (Millions of Dollars)
Cash and equivalents	$ 78	$ 45
Accounts receivable	66	11
159	Notes payable	29
	Total current assets	$303	$ 85
50
Total liabilities	$135
Gross fixed assets	225	Common stock	114
Less depreciation	78	Retained earnings	201
$147	Total stockholders’ equity	$315
	$450

Cost of goods sold

Selling expenses

Interest expense

Net income

Income Statement for Year Ended December 31, 2018 (Millions of Dollars)
Net sales	$795.0
660.0
Gross profit	$135.0
73.5
EBITDA	$ 61.5
Depreciation expense	12.0
Earnings before interest and taxes (EBIT)	$ 49.5
4.5
Earnings before taxes (EBT)	$ 45.0
Taxes (40%)	18.0
$ 27.0

a. Calculate the ratios you think would be useful in this analysis.

b. Construct a DuPont equation, and compare the company’s ratios to the industry average ratios.

c. Do the balance sheet accounts or the income statement figures seem to be primarily responsible for the low profits?

d. Which specific accounts seem to be most out of line relative to other firms in the industry?

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?

The following will hopefully help you with your Du Ponts:

First
, please note that the third and last ratio of the Du Pont equation (p. 124) is Total Assets/Total Common Equity. This ratio is what we refer to as the “Equity Multiplier.” People often get confused about the denominator in this ratio. If you look at Table 3-1 on page 68, you will see that Total Common Equity is the TOTAL of the common stock and retained earnings. For the company that number is $940mm. Now, go back to the Du Pont on page 124 and look at the equity multiplier. They use that same $940mm. They do not just use the “common stock” number.

Now, look at problem 4-24 where they use some slightly different wording. It shows that “total stockholder equity” = $315mm. That is your number for the Du Pont. It is a common (no pun intended!) error for learners to think “total common equity” (for the DuPont)? That must mean “Common stock”! They then use only the $114mm instead of the total $315mm and incorrectly calculate the Du Pont.

Second,
 remember (read page 124) that the Du Pont should calculate the very same number that you derive by calculating the ROE ratio. Du Pont does not give you a different ROE, it helps you understand more about that same number (such as, why is the ratio the way it is). So, if your ROE ratio and your Du Pont are different, you have an error somewhere in either your ratio or your equation.

Third,
 here is a major hint on how to calculate the industry Du Pont in 4-23(b):

To get the EM for the industry, recognize that ROE/ROA = (NI/E)/(NI/A) = NI/E × A/NI = A/E = Equity multiplier = 2.5.

 

I hope all this helps!

 

Thanks

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.)

Barry Computer Company: Balance Sheet as of December 31, 2018 (in Thousands)

Cash

$ 77,500

Accounts payable

$129,000

Receivables

336,000

Other current liabilities

117,000

Inventories

241,500

Notes payable to bank

84,000

Total current assets

$ 655,000

Total current liabilities

$330,000

Long
–
term debt

256,500

Net fixed assets

292,500

Common equity (36,100 shares)

361,000

Total assets

$ 947,500

Total liabilities and equity

$947,500

Barry Computer Company: Income Statement for Year Ended December 31, 2018 (in
Thousands)

Sales

$1,607,500

Cost of goods sold

Materials

$717,000

Labor

453,000

Heat, light, and power

68,000

Indirect labor

113,000

Depreciation

41,500

1,392,500

Gross profit

$ 215,000

Selling expenses

115,000

General and administrative expenses

30,000

Earnings before interest and taxes (EBIT)

$ 70,000

Interest expense

24,500

Earnings before taxes (EBT)

$ 45,500

Federal and state income taxes (40%)

18,200

Net income

$ 27,300

Earnings per share

$ 0.75623

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.)
Barry Computer Company: Balance Sheet as of December 31, 2018 (in Thousands)
Cash $ 77,500 Accounts payable $129,000
Receivables 336,000 Other current liabilities 117,000
Inventories 241,500 Notes payable to bank 84,000
Total current assets $ 655,000 Total current liabilities $330,000

Long-term debt 256,500
Net fixed assets 292,500 Common equity (36,100 shares) 361,000
Total assets $ 947,500 Total liabilities and equity $947,500
Barry Computer Company: Income Statement for Year Ended December 31, 2018 (in
Thousands)
Sales

$1,607,500
Cost of goods sold

Materials $717,000

Labor 453,000

Heat, light, and power 68,000

Indirect labor 113,000

Depreciation 41,500 1,392,500
Gross profit

$ 215,000
Selling expenses

115,000
General and administrative expenses

30,000
Earnings before interest and taxes (EBIT)

$ 70,000
Interest expense

24,500
Earnings before taxes (EBT)

$ 45,500
Federal and state income taxes (40%)

18,200
Net income

$ 27,300
Earnings per share

$ 0.75623