Question 7 of 7

Problem 3-13 (Comprehensive Ratio Analysis)

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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	1,150,000		Other current liabilities	515,000
Total current assets	$2,935,000		Total current liabilities	$1,215,000
Net fixed assets	1,350,000		Long-term debt	400,000
			Common equity	2,670,000
Total assets	$4,285,000		Total liabilities and equity	$4,285,000

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	931,000
Earnings before interest and taxes (EBIT)	$ 194,000
Interest expense	40,000
Earnings before taxes (EBT)	$ 154,000
Federal and state income taxes (25%)	38,500
Net income	$ 115,500

1. 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	%

2. 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 %.

3. 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-slackentightenItem 13 credit or enforce a -Select-morelessItem 14 stringent collection policy.

   The total assets turnover ratio is well -Select-abovebelowItem 15 the industry average so sales should be -Select-decreasedincreasedItem 16 , assets -Select-decreasedincreasedItem 17 , or both.

   While the company's profit margin is -Select-higherlowerItem 18 than the industry average, its other profitability ratios are -Select-highlowItem 19 compared to the industry - net income should be -Select-higherlowerItem 20 given the amount of equity and assets.

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