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, 2018 (In Thousands)
Cash	$44,175		Accounts payable	$88,350
Receivables	265,050		Other current liabilities	141,360
Inventories	212,040		Notes payable to bank	70,680
Total current assets	$521,265		Total current liabilities	$300,390
			Long-term debt	$238,545
Net fixed assets	362,235		Common equity (34,456.5 shares)	344,565
Total assets	$883,500		Total liabilities and equity	$883,500

Barry Computer Company: Income Statement for Year Ended December 31, 2018 (In Thousands)
Sales			$1,550,000
Cost of goods sold
Materials	$744,000
Labor	310,000
Heat, light, and power	77,500
Indirect labor	170,500
Depreciation	46,500		1,348,500

Gross profit	$	201,500
Selling expenses		108,500
General and administrative expenses	$	15,500
Earnings before interest and taxes (EBIT)	$	77,500
Interest expense		19,084
Earnings before taxes (EBT)	$	58,416
Federal and state income taxes (40%)		23,366
Net income	$	35,050
Earnings per share	$	1.01722
Price per share on December 31, 2018	$	12.00

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

   Ratio	Barry	Industry Average
   Current	x	1.69x
   Quick	x	0.98x
   Days sales outstandinga	days	29.17 days
   Inventory turnover	x	7.98x
   Total assets turnover	x	2.09x
   Profit margin	%	2.11%
   ROA	%	4.41%
   ROE	%	11.30%
   ROIC	%	7.80%
   TIE	x	4.09x
   Debt/Total capital	%	48.40%
   M/B	%	5.20%
   P/E	%	14.68%
   EV/EBITDA	%	8.03%

   
   ^aCalculation is based on a 365-day year.
   
2. Construct the DuPont equation for both Barry and the industry. Round your answers to two decimal places.

   	FIRM	INDUSTRY
   Profit margin	%	2.11%
   Total assets turnover	x	2.09x
   Equity multiplier	x	x

3. Select the correct option based on Barry's strengths and weaknesses as revealed by your analysis.
   -Select-IIIIIIIVVItem 19
   1. 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.
   2. 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.
   3. 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.
   4. 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.
   5. 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.
4. Suppose Barry had doubled its sales as well as its inventories, accounts receivable, and common equity during 2018. 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.)
   -Select-IIIIIIIVVItem 20
   1. If 2018 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 2018 ratios will be misled, and a return to supernormal conditions in 2019 could hurt the firm's stock price.
   2. If 2018 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 2018 ratios will be well informed, and a return to normal conditions in 2019 could hurt the firm's stock price.
   3. If 2018 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 2018 ratios will be misled, and a return to normal conditions in 2019 could hurt the firm's stock price.
   4. If 2018 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 2018 ratios to be well informed, and a return to normal conditions in 2019 could help the firm's stock price.
   5. If 2018 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 2018 ratios will be misled, and a continuation of normal conditions in 2019 could hurt the firm's stock price.

Answer 1