4-22. Data for Barry Computer Company and its industry averages follow: A. Calcu

Question

4-22. Data for Barry Computer Company and its industry averages follow: A. Calculate the indicated ratios for Barry. B. Construct and extend DuPont evaluation for both Barry and the industry. C. Outline Barry’s strengths and weaknesses as revealed by your analysis. D. Suppose Barry had doubled its sales as well as its inventories, accounts receivable, and common equity during 2004. 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 as of December 31, 2003 (In Thousands) Cash $77,500 Accounts payable $129,000 Receivables 336,000 Notes payable 84,000 Inventories 241,500 Other current liabilities 117,000 Total Cash Assets 655,000 Total current liabilities 330,000 Net fixed assets 292,500 Long-term debt 256,500 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 (in Thousands) Sales $1,607,500 Costs 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 Earning before taxes (EBT) $45,500 Federal and state incomes taxes (40%) 18,200 Net Income $27,300 Ratio Barry Industry Average Current Asserts/current liabilities ? 2.0X Days sales outstanding ? 35 days Sales/Inventory ? 6.7X Sales/fixed assets ? 12.1X Sales/total assets ? 3.0X Net/incomes sales ? 1.20% Net income/total assets ? 3.60% Net income/common equity ? 9.00% Total debt/total assets ? 60.00%

Explanation / Answer

a. The ratios are as follows for Barry Company

1. Current assets / Current liabilities = 655,000/330,000 =1.98

2. Days sales Outstanding : Accounts Receivable/ Net Sales * 365 = 336,000/ 1,607,500 * 365 = 76.29 days

3. Sales/ Inventory = 1,607,500/241,500 = 6.65

4. Sales /Fixed assets = 1,607,500/ 292,500 = 5.495 = 5.50

5. Sales/Total assets = 1,607,500/947,500 = 1.6965 = 1.70

7. Net Income / Sales = 27,300/1,607,500 = 0.01698 = 1.698% = 1.70%

8. Net Income/Total assets = 27,300/947,500 = 2.88%

9. Net Income / Common Equity = 27,300/361,000 = 7.56%

10. Total debt/ Assets = (256,500+330,000)/947,500 = 0.6185 = 61.85%

The Du-pont anaysis for Barry is:

ROE = Net profit margin * total asset turnover * Equity Multiplier

= Net Income/ Net Sales * Net Sales/ Total assets * Total Assets/Equity

0.01698 * 1.6965 * 947,500/361,000 = 0.0758 = 7.58%

The ROE of 7.56% is equal to the ROE calculated 7.56(In point 9). Hence Du-pont formula holds

The Du-point for the Industry is:

=Net Income/ Net Sales * Net Sales/ Total assets * Total Assets/Equity

Given D/(D+E) = 0.6, Hence E/(D+E) = 1-0.6 =0.4. Hence (D+E)/E = Total assets/Equity = 1/0.4 =2.5

0.012 * 3.00 * 2.5 = 9.00%

This is the Du-pont analysis for the industry

Strengths of Barry:It has a higher net profit margin than the industry, simialar Current Ratio, lower level of total debt

Weaknesses of Barry: Days sales outstanding is higher when compared to industry meaning that it take longer to collect the accounts receivable. Secondly, the return on equity is slightly lower than Industry.

When the sales , inventory, account recievable and Equity is doubled, the ratios namely, Sales/Fixed Assets, Sales/Total assets will double since the assets remains constant and sales is doubles. Ratios like Sales /Inventory will not change since both numerator and demoninator of the ratio double and will have no effect.

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