2. Problem 4.23 (Ratio Analysis)

eBook

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 thousa

shares is shown in thousands too.

Cash

Receivables

Inventories

Barry Computer Company:

Balance Sheet as of December 31, 2021 (in thousands)

$ 43,470

Accounts payable

239,085

Other current liabilities

217,350

Notes payable to bank

$499,905

Total current liabilities

Total current assets

Net fixed assets

Total assets

224,595

$724,500

$ 86,940

94,185

57,960

$239,085

Long-term debt

217,350

Common equity (26,806.5 shares) 268,065

Total liabilities and equity

$724,500/nIncome Statement for Year Ended December 31, 2021 (in thousands)

$1,150,000

Sales

Cost of goods sold

Materials

Labor

Heat, light, and power

Indirect labor

Gross profit

Selling expenses

General and administrative expenses

Depreciation

Earnings before interest and taxes (EBIT)

Interest expense

Earnings before taxes (EBT)

Federal and state income taxes (25%)

Net income

Earnings per share

Price per share on December 31, 2021

$506,000

322,000

57,500

80,500

966,000

$ 184,000

69,000

34,500

34,500

$ 46,000

21,735

$ 24,265

6,066

18,199

0.6789

12.00

$

$

$/na. Calculate the indicated ratios for Barry. Do not round intermediate calculations. Round your answers to two decimal places.

Ratio

Barry

Industry Average

Current

Quick

Days sales outstandinga

Inventory turnover

Total assets turnover

Profit margin

ROA

ROE

ROIC

X

X

days

X

X

%

%

%

%

2.02x

1.21x

35 days

5.78X

1.79x

1.48%

2.64%

7.22%

7.40%/nKUL

ROIC

TIE

Debt/Total capital

M/B

P/E

EV/EBITDA

aCalculation is based on a 365-day year.

70

Profit margin

Total assets turnover

Equity multiplier

%

X

%

b. Construct the DuPont equation for both Barry and the industry. Do not round intermediate calculations. Round your answers to two decimal places.

FIRM

INDUSTRY

1.48%

1.79x

%

X

1.2270

X

7.40%

2.15x

49.57%

4.20

20.41

9.37

X/nc. Select the correct option based on Barry's strengths and weaknesses as revealed by your analysis.

I. 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.

II. 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.

III. 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.

IV. 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.

V. 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/nIV. 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.

V. 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./nd. Suppose Barry had doubled its sales as well as its inventories, accounts receivable, and common equity during 2021. 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.)

I. If 2021 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 2021 ratios will be misled, and a continuation of normal conditions in 2022 could hurt the firm's stock price.

II. If 2021 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 2021 ratios will be misled, and a return to supernormal conditions in 2022 could hurt the firm's stock price.

III. If 2021 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 2021 ratios will be well informed, and a return to normal conditions in 2022 could hurt the firm's stock price.

IV. If 2021 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 2021 ratios will be misled, and a return to normal conditions in 2022 could hurt the firm's stock price.

V. If 2021 represents a period of supernormal growth 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 2021 ratios to be well informed, and a return to normal conditions in 2022 could help the firm's stock price.