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 $202,860 Accounts payable $144,900 Receivables 565,110 Other current liabilities 188,370 Inventories 333,270 Notes payable to bank 86,940    Total current assets $1,101,240    Total current liabilities $420,210 Long-term debt $333,270 Net fixed assets 347,760 Common equity (69,552 shares) 695,520 Total assets $1,449,000 Total liabilities and equity $1,449,000 Barry Computer Company: Income Statement for Year Ended December 31, 2018 (In Thousands) Sales $2,300,000 Cost of goods sold    Materials $1,012,000    Labor 667,000    Heat, light, and power 115,000    Indirect labor 161,000    Depreciation 92,000 2,047,000 Gross profit $ 253,000 Selling expenses 138,000 General and administrative expenses $ 69,000    Earnings before interest and taxes (EBIT) $ 46,000 Interest expense 23,329    Earnings before taxes (EBT) $ 22,671 Federal and state income taxes (40%) 9,068 Net income $ 13,603 Earnings per share $ 0.19558 Price per share on December 31, 2018 $ 10.00 Calculate the indicated ratios for Barry. Round your answers to two decimal places. Ratio Barry              Industry Average Current x 2.63x Quick x 1.88x Days sales outstandinga days 41.91 days Inventory turnover x 7.54x Total assets turnover x 1.79x Profit margin   % 0.55% ROA   % 0.99% ROE   % 2.17% ROIC   % 7.90% TIE x 2.00x Debt/Total capital   % 36.56% M/B   % 5.00% P/E   % 53.97% EV/EBITDA   % 8.68% aCalculation is based on a 365-day year. Construct the DuPont equation for both Barry and the industry. Round your answers to two decimal places. FIRM INDUSTRY Profit margin   % 0.55% Total assets turnover x 1.79x Equity multiplier x x Select the correct option based on Barry's strengths and weaknesses as revealed by your analysis. -Select-IIIIIIIVVItem 19 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. 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. 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. 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. 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. 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 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 2018 could hurt the firm's stock price. 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. 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. 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. 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.

Answer 1