Question

Comprehensive Ratio Analysis

Data for Lozano Chip Company and its industry averages follow.

Lozano Chip Company: Balance Sheet as of December 31, 2016 (Thousands of Dollars)

Cash	$  225,000		Accounts payable	$601,866
Receivables	1,575,000		Notes payable	326,634
Inventories	1,125,000		Other current liabilities	525,000
Total current assets	$2,925,000		Total current liabilities	$1,453,500
Net fixed assets	1,350,000		Long-term debt	1,068,750
			Common equity	1,752,750
Total assets	$4,275,000		Total liabilities and equity	$4,275,000

Lozano Chip Company: Income Statement for Year Ended December 31, 2016 (Thousands of Dollars)

Sales	$7,500,000
Cost of goods sold	6,375,000
Selling general and administrative expenses	825,000
Earnings before interest and taxes (EBIT)	$    300,000
Interest expense	111,631
Earnings before taxes (EBT)	$    188,369
Federal and state income taxes (40%)	75,348
Net income	$    113,022

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

   Ratio	Lozano	Industry Average
   Current assets/Current liabilities		2.0
   Days sales outstanding*	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	%	30.0%
   Total liabilities/Total assets	%	60.0%
   *Calculation is based on a 365-day year.

2. Construct the extended Du Pont equation for both Lozano and the industry. 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
   

Answer 1

a]

Current assets/Current liabilities =  $2,925,000 / $1,453,500 = 2.01

Days sales outstanding = 365 * accounts receivable / sales = 365 * 1,575,000 / 7,500,000 = 76.65 days

COGS/Inventory = 5.67

Sales/Fixed assets = 7,500,000 / 1,350,000 = 5.56

Sales/Total assets =  7,500,000 / 4,275,000 = 1.75

Net income/Sales =  113,022 / 7,500,000 = 1.15%

Net income/Total assets =  113,022 / 4,275,000 = 2.64%

Net income/Common equity =  113,022 / 1,752,750 = 6.45%

Total debt/Total assets = Long-term debt / Total assets = 1,068,750 / 4,275,000 = 25.00%

Total liabilities/Total assets =  (Total current liabilities + Long-term debt) / Total assets = (1,453,500 + 1,068,750) / 4,275,000 = 59.00%

b]

ROE = (Net income/Sales) * (Sales/Total assets) * (Total assets/Equity)

Firm = (113,022 / 7,500,000) * (7,500,000 / 4,275,000) * (4,275,000 / 1,752,750) = 6.45%

Total assets/Equity = 1 / (1 - (total liabilities / total assets))

Industry = 1.2% * 3.0 * [1 / (1 - 0.60)] = 9.00%

c]

Strengths:

• There are no significant strengths compared to industry

Weakness :

• DSO is much higher than industry average
• Fixed asset turnover is much lower than industry average
• ROE is much lower than industry average