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RATIO ANALYSIS

Data for Barry Computer Co. and its industry averages follow.

Barry Computer Company:Balance Sheet as of December 31, 2016 (In Thousands)Cash$151,040Accounts payable$320,960Receivables660,800Other current liabilities188,800Inventories509,760Notes payable to bank113,280   Total current assets$1,321,600   Total current liabilities$623,040Long-term debt$396,480Net fixed assets566,400Common equity868,480Total assets$1,888,000Total liabilities and equity$1,888,000
Barry Computer Company:
Income Statement for Year Ended December 31, 2016 (In Thousands)Sales$2,950,000Cost of goods sold   Materials$1,239,000   Labor885,000   Heat, light, and power206,500   Indirect labor118,000   Depreciation118,0002,566,500Gross profit$   383,500Selling expenses295,000General and administrative expenses29,500   Earnings before interest and taxes (EBIT)$     59,000Interest expense43,613   Earnings before taxes (EBT)$     15,387Federal and state income taxes (40%)6,155Net income$     9,232

  1. Calculate the indicated ratios for Barry. Round your answers to two decimal places.
    RatioBarry             Industry AverageCurrent x2.17xQuick x1.33xDays sales outstandinga days38.21 daysInventory turnover x6.32xTotal assets turnover x1.76xProfit margin %0.29%ROA %0.51%ROE %1.13%ROIC %7.90%TIE x1.40xDebt/Total capital %35.89%
    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.
    FIRMINDUSTRYProfit margin %0.29%Total assets turnover x1.76xEquity multiplier x x
  3. Select the correct option based on Barry’s strengths and weaknesses as revealed by your analysis.
    -Select-IIIIIIIVVItem 16
    1. The firm’s days sales outstanding 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.
    2. The firm’s days sales outstanding 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.
    3. 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. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry.
    4. The firm’s days sales outstanding 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.
    5. The firm’s days sales outstanding 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.
  4. Suppose Barry had doubled its sales as well as its inventories, accounts receivable, and common equity during 2016. 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 17
    1. If 2016 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 2016 ratios will be well informed, and a return to normal conditions in 2016 could hurt the firm’s stock price.
    2. If 2016 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 2016 ratios will be misled, and a return to normal conditions in 2017 could hurt the firm’s stock price.
    3. If 2016 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 2016 ratios to be well informed, and a return to normal conditions in 2017 could help the firm’s stock price.
    4. If 2016 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 2016 ratios will be misled, and a continuation of normal conditions in 2017 could hurt the firm’s stock price.
    5. If 2016 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 2016 ratios will be misled, and a return to supernormal conditions in 2017 could hurt the firm’s stock price.

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