Problem 4-23 RATIO ANALYSIS

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

Barry Computer Company:
Balance Sheet as of December 31, 2016 (In Thousands)
Cash	$129,015		Accounts payable	$143,350
Receivables	573,400		Other current liabilities	114,680
Inventories	315,370		Notes payable to bank	114,680
Total current assets	$1,017,785		Total current liabilities	$372,710
			Long-term debt	$387,045
Net fixed assets	415,715		Common equity	673,745
Total assets	$1,433,500		Total liabilities and equity	$1,433,500

Barry Computer Company: Income Statement for Year Ended December 31, 2016 (In Thousands)
Sales			$2,350,000
Cost of goods sold
Materials	$1,057,500
Labor	493,500
Heat, light, and power	141,000
Indirect labor	211,500
Depreciation	47,000		1,950,500

Gross profit		$ 399,500
Selling expenses		188,000
General and administrative expenses		70,500
Earnings before interest and taxes (EBIT)		$ 141,000
Interest expense		42,575
Earnings before taxes (EBT)		$ 98,425
Federal and state income taxes (40%)		39,370
Net income		$ 59,055

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

Ratio	Barry	Industry Average
Current	x	2.68x
Quick	x	1.93x
Days sales outstandinga	days	42.41 days
Inventory turnover	x	7.98x
Total assets turnover	x	1.81x
Profit margin	%	2.39%
ROA	%	4.34%
ROE	%	9.74%
ROIC	%	7.20%
TIE	x	3.26x
Debt/Total capital	%	41.58%

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

	FIRM	INDUSTRY
Profit margin	%	2.39%
Total assets turnover	x	1.81x
Equity multiplier	x	x

Select the correct option based on Barry's strengths and weaknesses as revealed by your analysis. -Select-IIIIIIIVVItem 16

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, assets, and invested capital. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry.

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, assets, and invested capital. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry.

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, assets, and invested capital. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry.

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, assets, and invested capital. However, the company seems to be in an above average liquidity position and financial leverage is similar to others in the industry.

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, assets, and invested capital. However, the company seems to be in a below 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 2016. 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 17

If 2016 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 2016 ratios to be well informed, and a return to normal conditions in 2017 could help the firm's stock price.

If 2016 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 2016 ratios will be misled, and a continuation of normal conditions in 2017 could hurt the firm's stock price.

If 2016 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 2016 ratios will be misled, and a return to supernormal conditions in 2017 could hurt the firm's stock price.

If 2016 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 2016 ratios will be well informed, and a return to normal conditions in 2017 could hurt the firm's stock price.

If 2016 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 2016 ratios will be misled, and a return to normal conditions in 2017 could hurt the firm's stock price.