4ISb 7o0,o co Lecture 3 Exercise #3 Assume that you were recently hired as a fin

Question

4ISb 7o0,o co Lecture 3 Exercise #3 Assume that you were recently hired as a financial analyst by Barry Compuuter C manufacturer of computer components. Your first task is to conduct a financial statement analysis of the firm covering the last year. Your boss has supplied you with the financial data which appear on the back of this page. ompany, a Perform a complete ratio analysis for Bary Computer Compary in comparison with the industry average. Make sure to take the following steps: Write the formula for each ratio for which the industry average is given. a. h. Insert the proper numbers in each ratio and calculate the result. c Compare each ratio with the industry average and comment on each ratio. d. Sum up your analysis and state the weaknesses and strengths of the company. J State what might be done to overcome its weaknesses and discuss the effects of your recommendations on the ratios.

Explanation / Answer

Ratios Barry Computer Company Ind. Av. Company Performance Strength/Weakness Current Ratio Current assets/Current liabilities (77500+336000+241500)/(129000+84000+117000)= 1.98 2 Almost same.Liquidity is good Strength Days Sales o/s 365/(A/cs.Receivables Turnover) ie. 365/(Net credit sales/Accounts receivables) 365/(1607500/336000)= In days 76 35 days Takes more than twice to collect receivables Weakness Inventory Turnover COGS/Inventory 1392000/241500= 5.8 6.7 Inventory is converted to sales more frequently than Industry peers Strength Total assets turnover Sales/Total assets 1607500/947500= 1.7 3 Generates only almost as half the $ sales per $ of asset employed -- compared to the industry average. Weakness Profit margin Net Income/Sales 27300/1607500= 1.70% 1.20% $ profit generated per $ of sales ,is more than the industry average.Profitability is good Strength ROA Net Income/Total assets 27300/947500= 2.88% 3.6% $ income generated per $ of assets employed is less than the industry average. Weakness ROE Net Income/Total equity 27300/361500= 7.55% 9% $ income generated per $ of equity employed also is less than the industry average. Weakness Debt Total Liabilities/Total assets (Current liabilities+LT Debt)/Total assets 586500/947500= 61.90% 60% % of Debt-funding of assets is only slightly more than the industry average. Strength Financial Leverage= Total assets/equity 947500/361500= Solving for FL --y equating-9%=1.20%*3*x 2.62 2.5 Du-Pont equation=PM*ATO*FL 1.70%*1.7*2.62= 1.20%*3*2.5 7.57% 9% Suggestions for improvement: As the strengths suggest, the company has good liquidity position, ie. The cash-capacity to meet its immediate obligations,if any arising. Inventory is turned over to sales more frequently. Expenses (both COGS& other opg. Exp.) are under control,giving a high profit margin. Outside debt-funding is also almost as per industry average. So,coming to the weakness areas, 1..Receivables are taking more than twice the time , to be converted to cash--- which if proper collection drives are undertaken, the resultant cash can be gainfully employed, either in more inventories for sale(as the company has good inventory turnover) or invested in marketable securities. Also the real liquidity position can be increased further. 2.. Assets seem to be under-employed.Total assets turnover also suggests the same point,that there is scope for increasing sales generated.       Moreover, analysing through the DuPont equation, it becomes crystal clear that ROE is less because of the excess investment in assets, which brings down both the ROA & total assets turnover figures, in comparison to the industry figures.       Equity & debt proportions are almost equal for both the company & Industry peers. So, summing up , asset-utilisation is the major draw back, with this company's performance,followed by receivables collection. Improving the same will improve both the ROA & ROE & teh working capital position.

Related Questions

Navigate

• Browse (All)
• Browse 4
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.