Problem 4-22 Ratio Analysis

Data for Barry Computer Co. and its industry averages follow.

Barry Computer Company:
Balance Sheet as of December 31, 2011 (In Thousands)
Cash	$201,135		Accounts payable	$274,275
Receivables	493,695		Notes payable	164,565
Inventories	548,550		Other current liabilities	201,135
Total current assets	$1,243,380		Total current liabilities	$639,975
			Long-term debt	$493,695
Net fixed assets	585,120		Common equity	694,830
Total assets	$1,828,500		Total liabilities and equity	$1,828,500

Barry Computer Company: Income Statement for Year Ended December 31, 2011 (In Thousands)
Sales			$2,650,000
Cost of goods sold
Materials	$1,219,000
Labor	556,500
Heat, light, and power	132,500
Indirect labor	238,500
Depreciation	106,000		$2,252,500

Gross profit		$397,500
Selling expenses		159,000
General and administrative expenses		79,500
Earnings before interest and taxes (EBIT)		$159,000
Interest expense		59,243
Earnings before taxes (EBT)		99,757
Federal and state income taxes (40%)		39,903
Net income		$59,854

Calculate the indicated ratios for Barry. Round your answers to two decimal places.

Ratio	Barry	Industry Average
Current	x	1.92x
Quick	x	1.08x
Days sales outstandinga	days	32.38days
Inventory turnover	x	4.97x
Total assets turnover	x	1.60x
Net profit margin	%	2.15%
ROA	%	3.45%
ROE	%	9.57%
Total debt/total assets	%	64.03%

aCalculation is based on a 365-day year. Construct the extended Du Pont equation for both Barry and the industry. Round your answers to two decimal places.

	FIRM	INDUSTRY
Net profit margin	%	2.15%
Total assets turnover	x	1.60x
Equity multiplier

Outline Barry's strengths and weaknesses as revealed by your analysis. -Select-IIIIIIIVVItem 14

a.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.

b.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.

c.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.

d.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.

e.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 2011. 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.) -Select-IIIIIIIVVItem 15

a.If 2011 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 2011 ratios to be well informed, and a return to normal conditions in 2012 could help the firm's stock price.

b.If 2011 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 2011 ratios will be misled, and a continuation of normal conditions in 2012 could hurt the firm's stock price.

c.If 2011 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 2011 ratios will be misled, and a return to supernormal conditions in 2012 could hurt the firm's stock price.

d.If 2011 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 2011 ratios will be well informed, and a return to normal conditions in 2012 could hurt the firm's stock price.

e.If 2011 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 2011 ratios will be misled, and a return to normal conditions in 2012 could hurt the firm's stock price.