Problem 13.

9 Ratio analysis

Data for Barry Computer Company and its industry average follow.

a. Calculate the indicated ratio for Barry?

b. Construct the extended Du point equation for both Barry and the industry?
c. Outline Barry‘s strengths and weakness as revealed by your analysis?
d. Suppose Morton had doubled its sales as well as its inventories, accounts receivable, and common equity
during 2010. 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.)

Barry Computer Company: Balance Sheet for Year Ended December

31, 2004 (Thousands of Dollars)

Accounts payable $129,000

Cash $ 77,500 Notes payable 84,000
Receivables 336,000 Other current liabilities 117,000
Inventories 241,500 Total current liabilities $330,000
Total current assets $655,000 Long-term debt 256,500
Net fixed assets 292,500 Common equity 361,000
Total assets $947,500 Total liabilities and equity $947,500
Barry Computer Company: Income Statement for Year Ended December
31, 2004 (Thousands of Dollars)

Sales $1,607,500
Cost of goods sold 1,392,500
Selling, general, and administrative expenses 145,000
Earnings before interest and taxes (EBIT) $ 70,000
Interest expense 24,500
Earnings before taxes (EBT) $ 45,500
Federal and state income taxes (40%) 18,200
Net income $ 27,300

Ratio Barry Industry Average

Current assets/Current liabilities __________ 2.0

Day’s sales outstanding __________ 35.0 days
Sales/Inventory __________ 6.7
Sales/Fixed assets __________ 12.1
Sales/Total assets __________ 3.0
Net income/Sales __________ 1.2%
Net income/Total assets __________ 3.6%
Net income/Common equity __________ 9.0%
Total debt/Total assets __________ 60.0%

Calculation is based on 365 days


Current assets/Current liabilities
Day’s sales outstanding
total Current Assets 655,000
= total Current liabilites ¿ = 330,000 = 1.98: 1
¿
Account Receivable Ending
= x 365
total Credit Sales

366,000
= x 365 = 83 days
1,607,500

Sales 1,607,500
Sales/Inventory = = = 6 times
inventory 241,500

Sales 1,607,500
Sales/Fixed assets = = = 5.49 times
¿ Assets 292,500

Sales 1,607,500
Sales/Total assets = = = 1.965 times
total Assets 947,500

net income 27,300

Net income/Sales = = = 1.7 %
sales 1,607,500

net income 27,300

Net income/Total assets = x100 = x 100 = 2.88%
total assets 947,500

net income 27,300

Net income/Common equity = x 100 = x100 = 7.5 %
common equity 361,000
2.0x
total debt 586,000 35.0 days
Total debt/Total assets = x 100 = = x 100 =
total Assets 947,500 6.7x
12.1x
61.9 % 3.0x
1.2%
3.6%
Ratio Barry 9.0%
Industry Average 60.0%
Current assets/Current liabilities 1.98x
Day’s sales outstanding 83 days
Sales/Inventory 6.65 x
Sales/Fixed assets 5.49x
Sales/Total assets 1.6965x
Net income/Sales 1.7 %
Net income/Total assets 2.88 %
Net income/Common equity 7.5 %
Total debt/Total assets 61.9 %

COMMENTS

a. It show sufficient current assets level is maintained to pay current liabilities.

b. Company is Collecting its ac receivable on the average in 83 days as compared to
industry 35 days it show that collection department is not doing efficiently and some
measure are to be taken to reduce the outstanding period from 83 days to 35 days.
c. Barry company sales generated power through the fixed assets is less the 15 % of
industry which might be due to following factors.
1. Inferior goods of quality is not better.
2. The behavior of stuff is not good.
3. In efficiently of sales department and marketing department
d. Industry sales is better than Barry company
e. Same interpretation.
f. 1.7 is the better the probabilities of Barry Company is rather better as compared to
industry which show the expenditure is under control.
g. The income generating power of total assets of the company is lower than the inventory
which show either some of assets are idol or not being used efficiency.
h. Net income is lower than the industry shareholders or investors maybe intended to
disinvestment.
i. The capital structure of the company is almost same of the industry.