Question

Carson Electronics' management has long viewed BGT Electronics as an industry leader and uses this firm as a model firm for analyzing its own performance. The balance sheets and income statements for the two firms are found below:

a. Calculate the following ratios for both Carson and BGT:

Current ratio Operating return on assets

Times interest earned Debt Ratio

Inventory turnover Average collection period

Total asset turnover Fixed asset turnover

Operating profit margin Return on equity

b. Analyze the differences you observe between the two firms. Comment on what you view as weaknesses in the performance of Carson as compared to BGT that Carson's management might focus on to improve its operations.

	Carson Electronics, Inc. Balance Sheet ($000)			BGT Electronics, Inc. Balance Sheet ($000)
Cash		$1,960			$1,470
Accounts receivable		4,500			6,050
Inventories		1,500			2,500
Current assets		$7,960			$10,020
Net fixed assets		15,970			25,000
Total assets		$23,930			$35,020
Accounts payable		$2,480			$5,010
Accrued expenses		970			1,500
Short-term notes payable		3,450			1,470
Current liabilities		$6,900			$7,980
Long-term debt		7,980			4,000
Owners' equity		9,050			23,040
Total liabilities and owners' equity		$23,930			$35,020

	Carson Electronics, Inc. Income Statement ($000)			BGT Electronics, Inc. Income Statement ($000)
Net sales (all credit)		$47,960			$69,950
Cost of goods sold		(36,050)			(41,960)
Gross profit		$11,910			$27,990
Operating expenses		(7,970)			(12,050)
Net operating income		$3,940			$15,940
Interest expense		(1,120)			(580)
Earnings before taxes		$2,820			$15,360
Income taxes (40 %40% )		(1,128)			(6,144)
Net income		$1,692			$9,216

Answer 1

A) CARSON ELECTRONICS

Current Ratio = Current Assets /Current liabilities = 7960/6900 =1.153

Operating return on assets = Net Operating Income/ Total Assets = 3940/23930*100 = 16.46%

Times Interest earned or interest coverage ratio = Earnings before Interest and taxes / Interest = 3940/1120 =3.52

Debt Ratio = Total Debt / Total Assets = 7980/23930 = 0.33

Inventory turnover = Cost of goods Sold / Inventory = 36050/1500 =24.03

In order to calculate the average collection period first we need to calculate the debtors turnover ratio.

Debtors Turnover Ratio = Turnover OR Net sales / Debtors =47960/4500=10.66

Average collection period = 365/Debtors Turnover ratio =34.24 Days

Total asset Turnover = Turnover OR Net Sales/ Total Assets = 47960/23930 = 2

Fixed  Asset Turnover Ratio = Turnover Or Net Sales/ Fixed Assets =47960/15970 = 3

Operating Profit Margin Ratio = Net Operating Income OR Earning before Interest and taxes / Turnover OR Net sales =3940/47960= 8.22%

Return On Equity = Profit available to equity shareholders/ Owners Equity = 1692/9050 = 18.70%

BGT ELECTRONICS

Current Ratio= Current Assets /Current liabilities = 10020/7980 = 1.26

Operating return on assets = Net Operating Income/ Total Assets = 15940/35020*100 = 45.50%

Times Interest earned = 15940/580 = 27.48

Debt Ratio = Total Debt / Total Assets = 4000/35020 = 0.114

Inventory Turnover Ratio = Cost of Goods Sold/Inventory = 41960/2500 = 16.78

In order to calculate the average collection period first we need to calculate the debtors turnover ratio.

Debtors Turnover Ratio = Turnover OR Net sales / Debtors = 69950/6050 = 11.56

Average collection period = 365/Debtors Turnover ratio = 365/11.56= 31.57 days

Total asset Turnover = Turnover OR Net Sales/ Total Assets = 69950/35020 = 2

Fixed  Asset Turnover Ratio = Turnover Or Net Sales/ Fixed Assets = 69950/25000= 2.8

Operating Profit Margin Ratio = Net Operating Income OR Earning before Interest and taxes / Turnover OR Net   sales = 15940/69950 = 22.78%

Return On Equity = Profit available to equity shareholders/ Owners Equity = 9216/23040= 40%

B)

• Carson's debt burden is high as compared to BGT electronics .
• Carson's inventory Turnover ratio is very high due to low level of inventory as compared to BGT.