Comprehensive Ratio Analysis

Data for Lozano Chip Company and its industry averages follow.

Lozano Chip Company: Balance Sheet as of December 31, 2019

(Thousands of Dollars)

Cash $210,000 Accounts payable $600,000

Receivables 1,575,000 Notes payable 100,000

Inventories 1,160,000 Other current liabilities 520,000

Total current assets $2,945,000 Total current liabilities $1,220,000

Net fixed assets 1,330,000 Long-term debt 400,000

Common equity 2,655,000

Total assets $4,275,000 Total liabilities and equity $4,275,000

Lozano Chip Company: Income Statement for Year Ended December 31, 2019

(Thousands of Dollars)

Sales $7,500,000

Cost of goods sold 6,375,000

Selling, general, and administrative expenses 921,000

Earnings before interest and taxes (EBIT) $204,000

Interest expense 40,000

Earnings before taxes (EBT) $164,000

Federal and state income taxes (25%) 41,000

Net income $123,000

Calculate the indicated ratios for Lozano. Do not round intermediate calculations. Round your answers to two decimal places.

Ratio Lozano Industry Average

Current assets/Current liabilities

2.0

Days sales outstanding (365-day year)

days 35.0 days

COGS/Inventory

6.7

Sales/Fixed assets

12.1

Sales/Total assets

3.0

Net income/Sales

% 1.2 %

Net income/Total assets

% 3.6 %

Net income/Common equity

% 9.0 %

Total debt/Total assets

% 10.0 %

Total liabilities/Total assets

% 60.0 %

Use the extended DuPont equation to calculate ROE for both Lozano and the industry. Do not round intermediate calculations. Round your answers to two decimal places.

For the firm, ROE is

%.

For the industry, ROE is

%.

Outline Lozano's strengths and weaknesses as revealed by your analysis.

The firm's days sales outstanding is more than twice as long as the industry average, indicating that the firm shouldcredit or enforce astringent collection policy.

The total assets turnover ratio is wellthe industry average so sales should be, assets, or both.

While the company's profit margin isthan the industry average, its other profitability ratios arecompared to the industry - net income should begiven the amount of equity and assets.