Question

Comprehensive Ratio Analysis Data for Lozano Chip Company and its industry averages follow. Lozano Chip Company: Balance Sheet as of December 31, 2019 (Thousands of Dollars) Cash $   225,000 Accounts payable $   600,000 Receivables 1,575,000 Notes payable 100,000 Inventories 1,125,000 Other current liabilities 520,000   Total current assets $2,925,000   Total current liabilities $1,220,000 Net fixed assets 1,325,000 Long-term debt 400,000 Common equity 2,630,000 Total assets $4,250,000 Total liabilities and equity $4,250,000 Lozano Chip Company: Income Statement for Year Ended December 31, 2019 (Thousands of Dollars) Sales $7,500,000 Cost of goods sold 6,375,000 Selling, general, and administrative expenses 939,000   Earnings before interest and taxes (EBIT) $   186,000 Interest expense 40,000   Earnings before taxes (EBT) $   146,000 Federal and state income taxes (25%) 36,500 Net income $   109,500 Calculate the indicated ratios for Lozano. Do not round intermediate calculations. Round your answers to two decimal places. Ratio Lozano Industry Average Current assets/Current liabilities 2.0 Days sales outstanding (365-day year) 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 % 10.0 % Total liabilities/Total assets % 60.0 % Use the extended DuPont equation to calculate ROE for both Lozano and the industry. Do not round intermediate calculations. Round your answers to two decimal places. For the firm, ROE is %. For the industry, ROE is %. Outline Lozano's strengths and weaknesses as revealed by your analysis. The firm's days sales outstanding is more than twice as long as the industry average, indicating that the firm should -Select-slackentightenItem 13 credit or enforce a -Select-morelessItem 14 stringent collection policy. The total assets turnover ratio is well -Select-abovebelowItem 15 the industry average so sales should be -Select-decreasedincreasedItem 16 , assets -Select-decreasedincreasedItem 17 , or both. While the company's profit margin is -Select-higherlowerItem 18 than the industry average, its other profitability ratios are -Select-highlowItem 19 compared to the industry - net income should be -Select-higherlowerItem 20 given the amount of equity and assets.

Answer 1

Qa:

Current assets/Current liabilities =2,925,000/1,220,000=2.397

Days sales outstanding (365-day year)= 365* Accounts receivable/sales =365*1575000/7,500,000 =76.65

COGS/Inventory =6,375,000/1125000 =5.67

Sales/Fixed assets =7,500,000 /1,325,000 =5.66

Sales/Total assets= 7,500,000 /4,250,000=1.765

Net income/Sales= 109,500/ 7,500,000= 1.46%

Net income/Total assets =109,500/4,250,000 =2.576%

Net income/Common equity= 109,500/2,630,000 =4.16%

Total debt/Total assets = (400000+600000+100000)/4,250,000 =25.88%

Total LIABILITIES/Total assets=(400000+600000+100000+520000)/4,250,000 =38.11%

Qb:

ROE of firm=net income/equity =109,500/2,630,000 =4.16%

ROE of industry; Use dupont analysis to calculate

ROE industry=(net income/sales)*(sales/total asset)*(asset/equity) ----- all of industry standards

Asset/equity= [1/(net income/total asset)]*(net income/equity) ----- since the value is not given directly

ROE=1.2%*3* [ (1/3.6)*9] =9%

Qc:

The firm's days sales outstanding is more than twice as long as the industry average, indicating that the firm should -Select-tighten credit or enforce a -Select-more  stringent collection policy.

The total assets turnover ratio is well -Select-below the industry average so sales should be -Select-increased , assets -Select-decreased ,or both

While the company's profit margin is -Select-higher than the industry average, its other profitability ratios are -Select-low compared to the industry - net income should be -Select-higher given the amount of equity and assets.