Question

Problem 4-23
Ratio Analysis

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

Barry Computer Company:
Balance Sheet as of December 31, 2015 (In Thousands)
Cash	$77,500	Accounts payable	$129,000
Receivables	336,000	Other current liabilities	117,000
Inventories	241,500	Notes payable	84,000
Total current assets	$655,000	Total current liabilities	$330,000
Long-term debt	$256,500
Net fixed assets	292,500	Common equity	361,000
Total assets	$947,500	Total liabilities and equity	$648,000

Barry Computer Company: Income Statement for Year Ended December 31, 2015(In Thousands)
Sales	$1,607,500
Cost of goods sold
Materials	$717000
Labor	453,000
Heat, light, and power	68,000
Indirect labor	113,000
Depreciation	41,500	$1,39,500

Gross profit	$215,000
Selling expenses	115,000
General and administrative expenses	30,000
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

Calculate the indicated ratios for Barry. Round your answers to two decimal places.

Ratio	Barry	Industry Average
Current	x	2.0x
Quick	x	1.3x
Days sales outstandinga	days	35days
Inventory turnover	x	6.7x
Total assets turnover	x	3.0x
Profit margin	%	1.2%
ROA	%	3.6%
ROE	%	9.0%
ROIC	%	7.5%
TIE	x	3.0x
Debt/Total capital	%	47.0%

Application: Using Ratio Analysis To Inform Organizational Decisions

The Assignment: Barry Computer Company

Prepare a performance report on Barry Computer Company. (Problem 4-23 on pages 131-132 of the course text provides a balance sheet and an income statement for the company.)

Prepare your performance report to show calculations for the eleven ratios listed on page 131-132, as well as a comparison of your computed ratios with the listed industry averages.

Write a short memo to your supervisor explaining your findings and your recommendations for improvement.

Suggest some ways in which the company can plan to improve below industry average ratio performance.

Explain why your recommendations would be effective.

Be sure to list your computations in an appendix to your report.

Book: Fundamentals of Financial Management 14TH 16

Author:	Brigham, Eugene F.
ISBN-13:	978-1-285-86797-7

Prepare a performance report on Barry Computer Company. (Problem 4-23 on pages 131-132 of the course text provides a balance sheet and an income statement for the company.) Prepare your performance report to show calculations for the eleven ratios listed on page 131-132, as well as a comparison of your computed ratios with the listed industry averages. Write a short memo to your supervisor explaining your findings and your recommendations for improvement. Suggest some ways in which the company can plan to improve below industry average ratio performance. Explain why your recommendations would be effective. Be sure to list your computations in an appendix to your report.

Answer 1

Barry Computer Co Current Assets/ Current Liabilities -655000 / 330000 1.Current Ratio 1.98 2.Quick Ratio Cash Receivables/Current Liabilities 77500 336000 /330000 1.25 Days sales outstanding (Accounts Receivable/Credit Sales) x 365 (336000/1607500) x 365 76.29 days Inventory Turnover Sales/Inventory = 1607500 / 241500 6.66 Sales / Total Assets 1607500/947500 1.7 Total assets turnover Profit margin Net Income Sales 27300/1607500 1.70% Net Income/Total Assets 27300/947500 2.88% ROA ROE Net Income/ Common Equity 27300 361000 7.55% ROIC Net Income / Invested Capital -27300/ (361000 256500) -4.42% Net Income +Interest expense/ Interest expense 2730024500/24500 TIE Debt/Total capital Long Term Debt/ Total Capital - 256500/(256500361000) :41.54%

Comparison Industry Current Quick Days sales outstandinga Inventory turnover Total assets turnover Profit margin ROA ROE ROIC TIE Debt/Total capital Barry Computer Co 1.98 1.25 76.29 days 6.66 1.7 1.70% 2.88% 7.56% 4.42% 2.11 41.54% 1.3 35 days 6.7 1.20% 3.60% 9% 7.50% 47.00% Current Ratio is below 2 but almost matches industry Quick Ratio is 1.25 but almost matches industry Days sale outstanding shows cash blocked in operating cycle for longer period thus increasing interest cost Inventory turnover is 6.66 but almost matches industry Total Assets turnover at 1.7% shows company is not able to util ise its assets effectively Profit is margin is good above industry ROA, ROE and ROIC shows company is not utilising capital effectively to generate sales resulting in poor returns TIE shows Net Income before interest covers Interest expense at a lower rate Debt to total capital shows Debt is low compared to equity which is a good sign