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 Dollars) Cash $   235,000 Accounts payable $   600,000 Receivables 1,575,000 Notes payable 100,000 Inventories 1,130,000 Other current liabilities 545,000   Total current assets $2,940,000   Total current liabilities $1,245,000 Net fixed assets 1,315,000 Long-term debt 400,000 Common equity 2,610,000 Total assets $4,255,000 Total liabilities and equity $4,255,000 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 937,000   Earnings before interest and taxes (EBIT) $   188,000 Interest expense 40,000   Earnings before taxes (EBT) $   148,000 Federal and state income taxes (25%) 37,000 Net income $   111,000 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 % 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-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.

Answer 1

a)

Ratio	CALCULATIONS	Lozano	Industry Average
Current assets/Current liabilities	=29,40,000/12,45000	2.36	2
Days sales outstanding (365-day year)*	=(15,75,000/75,00,000)*365	76.65	35	days
COGS/Inventory	=63,75,000/11,30,000	5.64	6.7
Sales/Fixed assets	=75,00,000/13,15,000	5.70	12.1
Sales/Total assets	=75,00,000/42,55,000	1.76	3
Net income/Sales	=(1,11,000/75,00,000)*100	1.48	1.2	%
Net income/Total assets	=(1,11,000/42,55,000)*100	2.61	3.6	%
Net income/Common equity	=(1,11,000/26,10,000)*100	4.25	9	%
Total debt/Total assets #	=(14,10,000/42,55,000)*100	33.14	10	%
Total liabilities/Total assets%	=(16,45,000/42,55,000)*100	38.66	60	%
* 1)DSO = (ACCOUNTS RECEIVABLE/NET CREDIT SALES)*365
2)ASSUMED WHOLE SALES TO BE CREDIT SALES
# TOTAL DEBT = (LONG TERM DEBT+SHORT TERM DEBTS)-(CASH & CASH EQUIVALENTS)
=(4,00,000+12,45,000)-(2,35,000)
=14,10,000
%TOTAL LIABILITIES = TOTAL ASSETS-EQUITY
=42,55,000-26,10,000
=16,45,000

b)

LOZANA	CALCULATION	RESULT
ASSET TURNOVER=SALES/AVERAGE TOTAL ASSETS	REFER (a)	1.76
EQUITY MULTIPLIER=AVERAGE TOTAL ASSETS/AVERAGE SHAREHOLDERS EQUITY	=42,55,000/26,10,000	1.63
NET PROFIT MARGIN	REFER (a)	1.48
DUPONT ANALYSIS=NET PROFIT MARGIN*ASSET TURNOVER*EQUITY MULTIPLIER	=1.76*1.63*1.48	4.25
INDUSTRY	CALCULATION	RESULT
ASSET TURNOVER=SALES/AVERAGE TOTAL ASSETS	REFER (a)	3.00
EQUITY MULTIPLIER=AVERAGE TOTAL ASSETS/AVERAGE SHAREHOLDERS EQUITY	=(1/3.6)/(1/9)	2.50
NET PROFIT MARGIN	REFER (a)	1.20
DUPONT ANALYSIS=NET PROFIT MARGIN*ASSET TURNOVER*EQUITY MULTIPLIER	=3*2.5*1.2	9.00

NOTE:EQUITY MULTIPLIER IS CALCULATED DIVIDING INVERSE RATIOS OF NETINCOME/TOTAL ASSETS AND NETINCOME/EQUITY.

C)The firm's days sales outstanding is more than twice as long as the industry average,enforce a-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 lower given the amount of equity and assets.