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Barry Computer Company: Balance Sheet as of December 31, 2019 (In Thousands) Cash $ 44,950 Accounts...

Barry Computer Company:
Balance Sheet as of December 31, 2019 (In Thousands)
Cash $ 44,950 Accounts payable $ 143,840
Receivables 323,640 Other current liabilities 134,850
Inventories 269,700 Notes payable to bank 71,920
   Total current assets $ 638,290    Total current liabilities $ 350,610
Long-term debt 197,780
Net fixed assets 260,710 Common equity (35,061 shares) 350,610
Total assets $ 899,000 Total liabilities and equity $ 899,000
Barry Computer Company:
Income Statement for Year Ended December 31, 2019 (In Thousands)
Sales $ 1,550,000
Cost of goods sold
   Materials $759,500
   Labor 310,000
   Heat, light, and power 62,000
   Indirect labor 155,000
   Depreciation 77,500 1,364,000
Gross profit $ 186,000
Selling expenses 77,500
General and administrative expenses 46,500
   Earnings before interest and taxes (EBIT) $ 62,000
Interest expense 17,800
   Earnings before taxes (EBT) $ 44,200
Federal and state income taxes (25%) 11,050
Net income $ 33,150
Earnings per share $ 0.9455
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 × 1.75 ×
    Quick × 1.08 ×
    Days sales outstandinga days 36 days
    Inventory turnover × 6.27 ×
    Total assets turnover × 1.94 ×
    Profit margin % 2.00 %
    ROA % 3.88 %
    ROE % 10.51 %
    ROIC % 7.90 %
    TIE × 3.45 ×
    Debt/Total capital % 44.98 %
    M/B    3.30
    P/E    16.62
    EV/EBITDA    7.80

    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 % 2.00%
    Total assets turnover × 1.94×
    Equity multiplier × ×

c. 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 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.
  2. 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.
  3. 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. 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.
  5. 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.

d. 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 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.

Solutions

Expert Solution

a.

Ratio Formula Barry Industry Average
Current Ratio Total Current Assets / Total Current Liabilities 1.82 x 1.75 x
Quick Ratio ( Cash + Receivables ) / Total Current Liabilities 1.05 x 1.08 x
Days Sales Outstanding ( 365 x Receivables ) / Sales 76.2 days 36 days
Inventory Turnover Cost of Goods Sold / Inventory 5.06 x 6.27 x
Total Asset Turnover Sales / Total assets 1.72 x 1.94 x
Profit Margin Net Income / Sales 2.14 % 2.00 %
ROA Net Income / Total Assets 3.69 % 3.88 %
ROE Net Income / Common Equity 9.45 % 10.51 %
ROIC EBIT ( 1 - t ) / ( Notes Payable to Bank + Long Term Debt + Common Equity ) 7.50 % 7.90 %
TIE EBIT / Interest Expense 3.48 x 3.45 x
M/B Market Price per Share / Book Value per Share 1.30 3.30
P/E Market Price per Share / Earnings per Share 13.75 16.62

b.

Firm Industry
Profit Margin 2.14 % 2.00 %
Total Asset Turnover 1.72 x 1.94 x
Equity Multiplier 2.56 x 2.71 x

c. 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.

d. 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.

ekkarill92 answered 2 years ago
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