Question
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
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 | $ 225,000 | Accounts payable | $ 600,000 | |
Receivables | 1,575,000 | Notes payable | 100,000 | |
Inventories | 1,135,000 | Other current liabilities | 535,000 | |
Total current assets | $2,935,000 | Total current liabilities | $1,235,000 | |
Net fixed assets | 1,345,000 | Long-term debt | 400,000 | |
Common equity | 2,645,000 | |||
Total assets | $4,280,000 | Total liabilities and equity | $4,280,000 |
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 | 919,000 |
Earnings before interest and taxes (EBIT) | $ 206,000 |
Interest expense | 40,000 |
Earnings before taxes (EBT) | $ 166,000 |
Federal and state income taxes (25%) | 41,500 |
Net income | $ 124,500 |
- 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) 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 should -Select-slacken OR tighten credit or enforce a -Select-more OR less stringent collection policy.
The total assets turnover ratio is well -Select-above OR below the industry average so sales should be -Select-decreased OR increased, assets -Select-decreased OR increased, or both.
While the company's profit margin is -Select-higher OR lower than the industry average, its other profitability ratios are -Select-high OR low compared to the industry - net income should be -Select-higher OR lower given the amount of equity and assets.
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