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	$60,900		Accounts payable	$103,530
Receivables	170,520		Other current liabilities	54,810
Inventories	164,430		Notes payable to bank	66,990
Total current assets	$395,850		Total current liabilities	$225,330
			Long-term debt	$121,800
Net fixed assets	213,150		Common equity (26,187 shares)	261,870
Total assets	$609,000		Total liabilities and equity	$609,000

Barry Computer Company: Income Statement for Year Ended December 31, 2018 (In Thousands)
Sales			$1,050,000
Cost of goods sold
Materials	$472,500
Labor	283,500
Heat, light, and power	52,500
Indirect labor	63,000
Depreciation	52,500		924,000

Gross profit	$	126,000
Selling expenses		84,000
General and administrative expenses	$	21,000
Earnings before interest and taxes (EBIT)	$	21,000
Interest expense		10,962
Earnings before taxes (EBT)	$	10,038
Federal and state income taxes (40%)		4,015
Net income	$	6,023
Earnings per share	$	0.23000
Price per share on December 31, 2018	$	10.00

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

   Ratio	Barry	Industry Average
   Current	x	1.81x
   Quick	x	0.97x
   Days sales outstandinga	days	28.23 days
   Inventory turnover	x	6.57x
   Total assets turnover	x	2.01x
   Profit margin	%	0.55%
   ROA	%	1.10%
   ROE	%	2.56%
   ROIC	%	7.40%
   TIE	x	1.83x
   Debt/Total capital	%	41.29%
   M/B	%	3.00%
   P/E	%	45.88%
   EV/EBITDA	%	7.31%

   
   ^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	%	0.55%
   Total assets turnover	x	2.01x
   Equity multiplier	x	x

3. 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 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.
   2. 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.
   3. 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.
   4. 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.
   5. 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.
      
      
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.)
   1. 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.
   2. 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.
   3. 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.
   4. 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.
   5. 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.

Answer 1

Given,

	2,018
Cash	60,900
Receivable	170,520
Inventory	164,430
Current Asset	395,850
PPE	213,150
TA	609,000
Payables	103,530
Other curent liabilities	54,810
Notes Payable	66,990
Current Liability	225,330
LTD	121,800
Equity	261,870
Total L&E	609,000

	2,018
Sales	1,050,000
COGS
Material	472,500
Labor	283,500
Heat, Light, Power	52,500
Indirect labor	63,000
Depreciation	52,500
	924,000
Gross Margin	126,000
selling expense	84,000
general and administrative	21,000
EBIT	21,000
Interest Expense	10,962
EBT	10,038
Federal and state income tax	4,015
Net Income	6,023
EPS	0.23000
Price Per Share	10
no of shares	26,187

Answer a)

	Barry	Industry average
Current	1.76	1.81	Current asset / Current Liability
Quick	1.03	0.97	(Current asset-Inventory) / Current Liability
DSO (In days)	57.16	28.23	Inventory/Sales * 365
Inven turonover	6.39	6.57	Sales / Inventory
Total asset turnover	1.72	2.01	Sales / Total Assets
Profit Margin	0.57%	0.55%	Net Income / Sales
ROA	0.99%	1.10%	Net Income/ Total Assets
ROE	2.30%	2.56%	Net Income/ Total Equity
ROIC	2.30%	7.40%	EBIT(1-T) / (Total Equity and liability - non WC)
TIE	1.92	1.83%	EBIT / Interest
Debt / Total Capital	20.00%	41.29%	Debt / Equity + Debt
M/B	1.00	3.00%	Market Value / Book Value
P/E	43.48	45.88%	Market Value / Net Income
EV/EBITDA	4.39	7.31%	Market Value + Debt - Cash / EBITDA

Answer 2 )

Du Pont = Profit Margin * Total Asset Turnover * Equity Multiplier

	Barry	Industry average	Formula
Profit Margin	0.57%	0.55%	Net Income / Sales
Total asset turnover	1.72	2.01	Sales / Total Assets
Equity Multiplier	2.33		Total Asset / Equity

Answer 3 ) Option A is the right choice

Whatever mentioned in the option is correctly matches with the ratio analysis for 2018 hence bases on best suitability option A is the correct choice.

Answer 4) Option A is the right choice

If sales and working capital items double for 2018 only then it will not provide a correct picture for analysis as this is one time thing happen and to perform consistent ratio analysis one need to understand the what ratio's are and how they will perform in future. hence 2018 year will not give correct details for 2019 analysis.