4-23RATIO ANALYSIS

Data for Barry Computer Co. and its industry averages follow. Thefirm's debt is priced at par, so the market value of its debt equals its book value. Sincedollars are in thousands, the number of shares is 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, andcommon equity during 2021. How would that information affect the validity of yourratio analysis? (Hint: Think about averages and the effects of rapid growth on ratios ifaverages are not used. No calculations are needed.)

Barry Computer Company:

Balance Sheet as of December 31, 2021 (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, 2021 (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 1,351,000

Gross profit $256,500

Selling expenses 115,000

General and administrative expenses 30,000

Depreciation 41,500

Earnings before interest and taxes (EBIT) $70,000

Interest expense 21,000

Earnings before taxes (EBT) $49,000

Federal and state income taxes (25%) 12,250

Net income $36,750

Earnings per share $1.018

Price per share on December 31, 2021 $12.00

Ratio Barry Industry Average

Current _____ 2.0x

Quick _____ 1.3x

Days sales outstanding _____ 35 days

Inventory turnover _____ 5.7x

Total assets turnover _____ 3.0x

Profit margin _____ 1.6%

ROA _____ 4.8%

ROE _____ 12.1%

ROIC _____ 9.4%

TIE _____ 3.5x

Debt/Total capital _____ 47.0%

M/B _____ 4.22x

P/E _____ 13.27

EV/EBITDA _____ 9.14

*Calculation is based on a 365-day year.

4-24 DuPONT ANALYSIS

A firm has been experiencing low profitability in recent years. Performan analysis of the firm's financial position using the DuPont equation. The firm has no leasepayments but has a $2 million sinking fund payment on its debt. The most recent industryaverage ratios and the firm's financial statements are as follows:Industry Average RatiosCurrent ratio 33 Fixed assets turnover 63Debt-to-capital ratio 20% Total assets turnover 33Times interest earned 73 Profit margin 3.75%EBITDA coverage 93 Return on total assets 11.25%Inventory turnover 83 Return on common equity 16.10%Days sales outstandinga 24 days Return on invested capital 14.40%a Calculation is based on a 365-day year.

Balance Sheet as of December 31, 2021 (millions of dollars)

Cash and equivalents $78 Accounts payable $45

Accounts receivable 66 Other current liabilities 11

Inventories 159 Notes payable 29

Total current assets $303 Total current liabilities $85

Long-term debt 50 Total liabilities $135

Gross fixed assets 225 Common stock 114

Less depreciation 78 Retained earnings 201

Net fixed assets $147 Total stockholders' equity $315

Total assets $450 Total liabilities and equity $450

Income Statement for Year Ended December 31, 2021 (millions of dollars)

Net sales $795.00

Cost of goods sold 660.00

Gross profit $135.00

Selling expenses 73.50

EBITDA $61.50

Depreciation expense 12.00

Earnings before interest and taxes (EBIT) $49.50

Interest expense 4.50Earnings before taxes (EBT) $45.00

Taxes (25%) 11.25

Net income $33.75

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?