Question

Carson Electronics' management has long viewed BGT Electronics as an industry leader and uses this firm as a model firm for analyzing its own performance. The balance sheets and income statements for the two firms are found here: 

	Carson Electronics, Inc. Balance Sheet ($000)			BGT Electronics, Inc. Balance Sheet ($000)
Cash		$2,010			$1,450
Accounts receivable		4,540			5,960
Inventories		1,470			2,480
Current assets		$8,020			$9,890
Net fixed assets		16,030			25,050
Total assets		$24,050			$34,940
Accounts payable		$2,450			$4,990
Accrued expenses		990			1,500
Short-term notes payable		3,460			1,520
Current liabilities		$6,900			$8,010
Long-term debt		7,980			3,960
Owners' equity		9,170			22,970
Total liabilities and owners' equity		$24,050			$34,940

	Carson Electronics, Inc. Income Statement ($000)			BGT Electronics, Inc. Income Statement ($000)
Net sales (all credit)		$47,990			$69,980
Cost of goods sold		(36,040)			(42,010)
Gross profit		$11,950			$27,970
Operating expenses		(8,020)			(11,970)
Net operating income		$3,930			$16,000
Interest expense		(1,170)			(600)
Earnings before taxes		$2,760			$15,400
Income taxes (40%)		(1,104)			(6,160)
Net income		$1,656			$9,240

A.

Calculate the following ratios for both Carson and BGT:

Current ratio Times interest earned Inventory turnover Total asset turnover Operating profit margin

Operating return on assets Debt ratio Average collection period Fixed asset turnover Return on equity

B.  Analyze the differences you observe between the two firms. Comment on what you view as weaknesses in the performance of Carson as compared to BGT that Carson's management might focus on to improve its operations.

Answer 1

We can calculate the desired result as follows:

i) Current ratio = Current assets / Current liabilities

Current assets = Cash + Accounts recievable + Inventories

Current liabilities = Accounts payable + Accrued expenses + Short Term notes payable

Current ratio (Carson) = (2,010 + 4,540 + 1,470) / (2,450 + 990 + 3,460)

= 8,020 / 6,900 = 1.16

Current ratio (BGT) = (1,450 + 5,960 + 2,480) / (4,990 + 1,500 + 1,520)

= 9,890 / 8,010 = 1.23

ii) Times interest earned = Earnings before interest and taxes / Interest

Here, EBIT means net operating income

Times interest earned (Carson) = 3,930 / 1,170

= 3.36 times

Times interest earned (BGT) = 16,000 / 600

= 26.67 times

iii) Inventory turnover = Cost of goods sold / Inventories

Inventory turnover (Carson) = 36,040 / 1,470

= 24.48

Inventory turnover (BGT) = 42,010 / 2,480

= 16.94

iv) Total assets turnover = Sales / Total assets

Total assets turnover (Carson)= 47,990 / 24,050

= 2.00

Total assets turnover (BGT) = 69,980 / 34,940

= 2.00

v) Operating profit margin = (Operating profit (EBIT) / Sales) * 100

Operating profit margin (Carson) = (3,930 / 47,990) * 100

= 8.18%

Operating profit margin (BGT) = (16,000 / 69,980) * 100

= 22.86%

vi) Operating return on assets = (Operating return (EBIT) / Total assets) * 100

Operating return on assets (Carson) = (3,930 / 24,050) * 100

= 16.34%

Operating return on assets (BGT) = (16,000 / 34,940) * 100

= 45.79%

vii) Debt ratio = Total liabilities / Total assets

Total liabilities = Current liabilities + Long term debt

Debt ratio (Carson) = (6,900 + 7,980) / 24,050

= 0.62

Debt ratio (BGT) = (8,010 + 3,960) / 34,940

= 0.34

viii) Average collection period = (Accounts recievables / Sales) * 365 days

Average collection period (Carson) = (4,540 / 47,990) * 365

= 34.53 days

Average collection period (BGT) = (5,960 / 69,980) * 365 days

= 31.09 days

ix) Fixed assets turnover = Sales / Fixed assets

Fixed assets turnover (Carson) = 47,990 / 16,030

= 2.99

Fixed assets turnover (BGT) = 69,980 / 25,050

= 2.79

x) Return on equity = Profit after tax / Net worth

Net worth = Equity + Reserves

Return on equity (Carson) = 1,656 / (9,170 + 0)

= 0.18

Return on equity (BGT) = 9,240 / (22,970 + 0)

= 0.40

As there are multiple questions asked, I have solved the first 10 sub parts. Please post the question separately for rest parts to be answered.