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	$113,520		Accounts payable	$212,850
Receivables	425,700		Other current liabilities	227,040
Inventories	312,180		Notes payable to bank	156,090
Total current assets	$851,400		Total current liabilities	$595,980
			Long-term debt	$397,320
Net fixed assets	567,600		Common equity (42,570 shares)	425,700
Total assets	$1,419,000		Total liabilities and equity	$1,419,000

Barry Computer Company: Income Statement for Year Ended December 31, 2018 (In Thousands)
Sales			$2,150,000
Cost of goods sold
Materials	$903,000
Labor	451,500
Heat, light, and power	150,500
Indirect labor	193,500
Depreciation	86,000		1,784,500

Gross profit	$	365,500
Selling expenses		215,000
General and administrative expenses	$	64,500
Earnings before interest and taxes (EBIT)	$	86,000
Interest expense		39,732
Earnings before taxes (EBT)	$	46,268
Federal and state income taxes (40%)		18,507
Net income	$	27,761
Earnings per share	$	0.65213
Price per share on December 31, 2018	$	10.00 Construct the DuPont equation for both Barry and the industry. Round your answers to two decimal places. FIRM INDUSTRY Profit margin   % 1.21% Total assets turnover x 1.80x 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 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. 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. 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

Calculation of Barry Company's Ratios :

1.  Total assets turnover = Sales / Total assets = $2,150,000 / $1,419,000 = 1.52x

(Note: The Actual ratio uses Average Total assets, but here we are only given the balance of Total assets as at the end of the year)

2.  Profit margin : Net Profit margin = Net Income / Revenue = ($27,761 / $2,150,000) x 100 = 1.29%

Gross Profit margin = Gross Profit / Revenue = ($365,500 / $2,150,000) x 100 = 17%

3. ROA = Net income / Total assets

= (Sales / Total assets) x (Net Income / Sales) = Total assets turnover x Net Profit margin = 1.52 x 1.29 (we've calculated these figures above)

ROA = 1.96%

4. ROE = Net Income / Average Total Equity = ($27,761 / $425,700) x 100 = 6.52%

5. ROIC = Net Operating Profit after Tax (NOPAT) / Invested capital =>(which is :Common equity + Long term debt)

NOPAT = EBIT x (1 - Tax rate) = 86,000 x (1 - 0.40) = $51,600

ROIC = $51,600 / 425,700 + 397,320 = (51,600 / 823,020) x 100 = 6.27%

6. TIE (Times Interest Earned) or Interest Coverage Ratio = EBIT / Interest Expenses = $86,000 / $39,732 =2.16x

7. Debt/Total capital = Debt / (Debt + Common Equity) = $397,320 / ($397,320 + $425,700) = ($397,320 / $823,020) x 100 =  48.28%

8. M/B or Market Value / Book Value = Market price per share / Book value per share

Price per share given = $10

Book value per share = Book value of Equity / number of shares = $425,700 / 42,570 = $10

M/B = $10 / $10 = 100%

9. P/E or Price/Earnings = Price per share / Earnings per share = ($10 / $0.65213) x 100 = 1533.44% (This ratio is normally expressed in decimal)

10. EV / EBITDA :

EV (Enterprise Value) = Market value of common equity + Market value of Debt - Cash and marketable investments

= ($10 x 42,570 shares) + $397,320 - $113,520 = $709,500

EBITDA = EBIT + Depreciation = $86,000 + 86,000 = $172,000

EV / EBITDA = ($709,500 / $172,000) x 100 = 412.50%