Question

Data for Barry Computer Co. and its industry averages follow. The firm's debt is priced at par, so the market value of its debt equals its book value. Since dollars are in thousands, number of shares are shown in thousands too.

Barry Computer Company:
Balance Sheet as of December 31, 2019 (In Thousands)
Cash	$	199,125		Accounts payable	$	287,625
Receivables		862,875		Other current liabilities		265,500
Inventories		508,875		Notes payable to bank		199,125
Total current assets	$	1,570,875		Total current liabilities	$	752,250
				Long-term debt		508,875
Net fixed assets		641,625		Common equity (95,137.5 shares)		951,375
Total assets	$	2,212,500		Total liabilities and equity	$	2,212,500

Barry Computer Company: Income Statement for Year Ended December 31, 2019 (In Thousands)
Sales			$	2,950,000
Cost of goods sold
Materials	$1,327,500
Labor	619,500
Heat, light, and power	206,500
Indirect labor	265,500
Depreciation	88,500			2,507,500

Gross profit		$	442,500
Selling expenses			236,000
General and administrative expenses			59,000
Earnings before interest and taxes (EBIT)		$	147,500
Interest expense			50,888
Earnings before taxes (EBT)		$	96,612
Federal and state income taxes (25%)			24,153
Net income		$	72,459
Earnings per share		$	0.7616
Price per share on December 31, 2019		$	13.00

1. Calculate the indicated ratios for Barry. Do not round intermediate calculations. Round your answers to two decimal places.

   Ratio	Barry	Industry Average
   Current	×	2.12	×
   Quick	×	1.38	×
   Days sales outstandinga	days	50	days
   Inventory turnover	×	6.33	×
   Total assets turnover	×	1.50	×
   Profit margin	%	2.30	%
   ROA	%	3.45	%
   ROE	%	8.10	%
   ROIC	%	7.10	%
   TIE	×	3.00	×
   Debt/Total capital	%	42.07	%
   M/B		4.30
   P/E		19.09
   EV/EBITDA		9.93

   
   ^aCalculation is based on a 365-day year.
   
2. Construct the DuPont equation for both Barry and the industry. Do not round intermediate calculations. Round your answers to two decimal places.

   	FIRM	INDUSTRY
   Profit margin	%	2.30%
   Total assets turnover	×	1.50×
   Equity multiplier	×	×

3. Select the correct option based on Barry's strengths and weaknesses as revealed by your analysis.
   1. The firm's days sales outstanding ratio 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.
   2. The firm's days sales outstanding ratio 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.
   3. 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. Finally, it's market value ratios are also below industry averages. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry.
   4. The firm's days sales outstanding ratio 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.
   5. The firm's days sales outstanding ratio 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.
   -Select-IIIIIIIVVItem 19
4. Suppose Barry had doubled its sales as well as its inventories, accounts receivable, and common equity during 2019. 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.)
   1. If 2019 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 2019 ratios will be misled, and a continuation of normal conditions in 2020 could hurt the firm's stock price.
   2. If 2019 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 2019 ratios will be misled, and a return to supernormal conditions in 2020 could hurt the firm's stock price.
   3. If 2019 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 2019 ratios will be well informed, and a return to normal conditions in 2020 could hurt the firm's stock price.
   4. If 2019 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 2019 ratios will be misled, and a return to normal conditions in 2020 could hurt the firm's stock price.
   5. If 2019 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 2019 ratios to be well informed, and a return to normal conditions in 2020 could help the firm's stock price.

Answer 1

a..Ratio	Barry		Ind. Av.	ANSWER for c is iii. As explained here
Current
Current assets/Current liabilities	1570875/752250=	2.09	2.12	However, the company seems to be in an average liquidity position
Quick
(Current assets-Inventory)/Current liabilities	(1570875-508875)/752250=	1.41	1.38
Days sales outstanding (Days)
365/AR turnover	365/(2950000/862875)=	107	50	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
Inventory turnover
COGS/Inventory	2507500/508875=	4.93	6.33
Total assets turnover
Sales/Total assets	2950000/2212500=	1.33	1.5	The total assets turnover ratio is well below the industry average so sales should be increased, assets decreased, or both
Profit margin				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.
Net Income/sales	72459/2950000=	2.46%	2.30%
ROA
Net Income/Total assets	72459/2212500=	3.27%	3.45%
ROE
Net Income/Total Equity	72459/951375=	7.62%	8.10%
ROIC
(EBIT-Tax)/(Debt+Equity-Cash)	(147500-24153)/(508875+951375-199125)=	9.78%	7.10%
TIE
EBIT/Interest expense	147500/50888=	2.90	3
Debt/Total capital
Debt/(D+E)	508875/(508875+951375)=	34.85%	42.07%	financial leverage is similar to others in the industry.
M/B
Mkt value/Book value	(95137.5*13)/951375=	1.30	4.3	Finally, it's market value ratios are also below industry averages.
P/E
Mkt.price/sh/EPS	13/0.7616=	17.07	19.09
EV/EBITDA
Enterprise value/EBITDA	((95137.5*13)+508875)/(147500+88500)=	7.40	9.93

b. DuPont equation for both Barry and the industry.
	FIRM		IND.
Profit margin
Net Income/sales	72459/2950000=	2.46%	2.30%
Total assets turnover
Sales/Total assets	2950000/2212500=	1.33	1.5
Equity multiplier
Total assets/Total Equity	2212500/951375=	2.33	2.35
DuPont equation=ROE=PM*ATO*EM		7.62%	8.11%
Deirvation of Equity value for Industry
Net income/Total assets	3.45%
Net income/Total Equity	8.10%
Net income=3.45%*T/A=8.10%*T/E
so, T/A /T/E=8.10%/3.45%	2.35

c. Answer; Option .III
(as done above)
d. Answer: Option iv.
If 2019 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 2019 ratios will be misled, and a return to normal conditions in 2020 could hurt the firm's stock price.