Data for Lozano Chip Company and its industry averages follow.

a. Calculate the indicated ratios for Lozano

b. Construct the extended Du Pont equation for both Lozano and the industry.

c. Outline Lozano strengths and weaknesses as revealed by your analysis.

d. Suppose Lozano had doubled its sales as well as its inventories, accounts receivable, and common equity during 2012. 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).

Lozano Chip Company: Balance Sheet as of December 31, 2012 (Thousands of Dollars)

Cash $225,000 Accounts payable $601,866

Receivables 1,575,000 Notes payable 326,634

Inventories 1,125,000 Other current liabilities 525,000

Total current assets $2,950,000 Total current liabilities $1,453,500

Long-term debt 1,068,750

Net fixed assets 1,350,000 Common equity 1,752,750

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

Lozano Chip Company: Income Statement for Year Ended December 31, 2012 (Thousands of Dollars)

Sales $7,500,000

Cost of goods sold 6,375,000

Selling, general, and administrative expenses 825,000

Earnings before interest and taxes (EBIT) 300,000

Interest expense 111,631

Earnings before taxes (EBT) 188,369

Federal and state income tax (40%) 75,348

Net income $113,022

Ratio Lozano Industry Average

Current asset/Current liabilities 2.0

Days sales outstanding 35.0 days

Sales/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 liabilities/Total assets 60.0%

*Calculation is based on a 365-day year