Question

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.

Answer 1

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.