4-1: Ratio Analysis Problem 4-23 Ratio Analysis Data for Barry Computer Co. and its industry averages follow. Barry Computer Company: Balance Sheet as of December 31, 2014 (In Thousands) Cash $218,400 Accounts payable $218,400 Receivables 364,000 Other current liabilities 232,960 Inventories 320,320 Notes payable 160,160 Total current assets $902,720 Total current liabilities $611,520 Long-term debt $291,200 Net fixed assets 553,280 Common equity 553,280 Total assets $1,456,000 Total liabilities and equity $1,456,000 Barry Computer Company: Income Statement for Year Ended December 31, 2014 (In Thousands) Sales $2,600,000 Cost of goods sold Materials $1,066,000 Labor 702,000 Heat, light, and power 182,000 Indirect labor 234,000 Depreciation 130,000 $2,314,000 Gross profit $286,000 Selling expenses 208,000 General and administrative expenses 26,000 Earnings before interest and taxes (EBIT) $52,000 Interest expense 26,208 Earnings before taxes (EBT) 25,792 Federal and state income taxes (40%) 10,317 Net income $15,475 Calculate the indicated ratios for Barry. Round your answers to two decimal places. Ratio Barry Industry Average Current x 1.40x Quick x 0.91x Days sales outstandinga days 23.88days Inventory turnover x 8.86x Total assets turnover x 2.01x Profit margin % 0.56% ROA % 1.12% ROE % 3.11% ROIC % 7.30% TIE x 2.60x Debt/Total capital % 47.50% aCalculation is based on a 365-day year. Construct the Du Pont equation for both Barry and the industry. Round your answers to two decimal places. FIRM INDUSTRY Profit margin % 0.56% Total assets turnover x 2.01x Equity multiplier Outline Barry's strengths and weaknesses as revealed by your analysis. The firm's days sales outstanding is more than the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well above the industry average so sales should be increased, assets increased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity and assets. However, the company seems to be in an above average liquidity position and financial leverage is similar to others in the industry. The firm's days sales outstanding is comparable to the industry average, indicating that the firm should neither tighten credit nor enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets increased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity and assets. However, the company seems to be in a below average liquidity position and financial leverage is similar to others in the industry. The firm's days sales outstanding ratio is more than twice as long as the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets decreased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity and assets. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry. The firm's days sales outstanding is more than twice as long as the industry average, indicating that the firm should loosen credit or apply a less stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets increased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity and assets. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry. The firm's days sales outstanding is less than the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets decreased, or both. While the company's profit margin is lower than the industry average, its other profitability ratios are high compared to the industry - net income should be higher given the amount of equity and assets. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry. Suppose Barry had doubled its sales as well as its inventories, accounts receivable, and common equity during 2014. 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.) If 2014 represents a period of supernormal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have little meaning. Potential investors who look only at 2014 ratios will be misled, and a return to normal conditions in 2013 could hurt the firm's stock price. If 2014 represents a period of supernormal growth for the firm, ratios based on this year will be accurate and a comparison between them and industry averages will have substantial meaning. Potential investors need only look at 2014 ratios to be well informed, and a return to normal conditions in 2013 could help the firm's stock price. If 2014 represents a period of normal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have little meaning. Potential investors who look only at 2014 ratios will be misled, and a continuation of normal conditions in 2013 could hurt the firm's stock price. If 2014 represents a period of normal growth for the firm, ratios based on this year will be accurate and a comparison between them and industry averages will have substantial meaning. Potential investors who look only at 2014 ratios will be misled, and a return to supernormal conditions in 2013 could hurt the firm's stock price. If 2014 represents a period of supernormal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have substantial meaning. Potential investors who look only at 2014 ratios will be well informed, and a return to normal conditions in 2013 could hurt the firm's stock price. Check My Work (3 remaining) Icon Key Previous Question 8 of 9 NextProblem 4.23