Question

Prepare a performance report on Barry Computer Company. (Problem 4-23 on pages 140-141 of the course text provides a balance sheet and an income statement for the company.)

4-23 RATIO ANALYSIS Data for Barry Computer Co. and its industry averages follow. The firm's debt is priced at par, so the market value of its debt equals its book value. Since dol- lars are in thousands, number of shares are shown in thousands too. a. Calculate the indicated ratios for Barry. b. Construct the DuPont equation 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 2018. 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.) Ratio Barry Industry Average 2.0x Barry Computer Company: Balance Sheet as of December 31, 2018 (in Thousands) Cash $ 77,500 Accounts payable Receivables 336,000 Other current liabilities Inventories 241,500 Notes payable to bank Total current assets $ 655,000 Total current liabilities Long-term debt Net fixed assets 292,500 Common equity (36,100 shares) Total assets $947,500 Total liabilities and equity 1.3x 35 days $129,000 117,000 84,000 $330,000 256,500 361,000 $947,500 Current Quick Days sales outstanding Inventory turnover Total assets turnover Profit margin 6.7 X 3.0x 1.2% ROA 3.6% 9.0% ROE ROIC TIE 7.5% 3.0x 47.0% Debt/Total capital M/B 4.22 P/E 17.86 9.14 EV/EBITDA Barry Computer Company: Income Statement for Year Ended December 31, 2018 (in Thousands) Sales $1,607,500 Cost of goods sold Materials $717,000 Labor 453,000 Heat, light, and power 68,000 Indirect labor 113,000 Depreciation 41,500 1,392,500 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 Calculation is based on a 365-day year. Earnings per share Price per share on December 31, 2018 $ 0.75623 $ 12.00

• Prepare your performance report to show calculations for the 14 ratios listed on page 141, 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.

Financial Ratios	Formula
Current	Current assets/Current liabilities
Quick	Current assets-inventory/Current liabilities
Days Sales Outstanding	Accounts receivable/Sales per day
Inventory Turnover	Cost of goods sold/Inventories
Total Assets Turnover	Sales/Total assets
Profit Margin	Net income/Sales
ROA	Net income/Total assets
ROE	Net income/Equity
ROIC	EBIT(1-T)/Total capital
TIE	EBIT/Interest charges
Debt/Total Capital	Debt capital/Total Capital
M/B	Market price per share/Book value per share
P/E	Price per share/Earnings per share
EV/EBITDA	Enterprise Value/EBITDA

Answer 1

Financial Ratios	Formula	Ratios Fig.
Current	Current assets/Current liabilities	1.98x
Quick	Current assets-inventory/Current liabilities	1.25x
Days Sales Outstanding	Accounts receivable/Sales per day	76 days
Inventory Turnover	Cost of goods sold/Inventories	5.13x
Total Assets Turnover	Sales/Total assets	1.70x
Profit Margin	Net income/Sales	1.7%
ROA	Net income/Total assets	2.88%
ROE	Net income/Equity	7.56%
ROIC	EBIT(1-T)/Total capital	6.80%
TIE	EBIT/Interest charges	2.86x
Debt/Total Capital	Debt capital/Total Capital	41.54%
M/B	Market price per share/Book value per share	1.2
P/E	Price per share/Earnings per share	15.87
EV/EBITDA	Enterprise Value/EBITDA	4.84

ANALYSIS:

After evaluating the ratios, it can be observed that on one side – a few ratios are almost up-to-mark and thus nothing is to be done in that regard. But, on the other hand, a few aspects are very poor and need attention of the management or else the company could land in a crisis.

The major focus points are:

• Day sales outstanding has a whooping 76 days credit period which will create a cash-crunch in the company due to no-rotation of funds.
• Inventory Turnover should also be looked over. The sales team is not able to match the current level of production.
• Total assets turnover, ROA, ROE depict that the assets and owner’s equity are not being adequately utilised. Both Sales and net income are way behind the industrial avg. parameters in terms of these ratios.
• M/B and P/E ratios depict that the market value of company’s share is not satisfactory. The reason may its reputation in the market due to the above-mentioned deficiencies.
• The Enterprise value (i.e., total capital – cash & cash equivalents) is very less as compared to the industrial average.

RECOMMENDATIONS:

The management must focus on its internal control, i.e.,

• Cost management of product
• Production efficiency
• lead time of procurement & distribution channels
• Credit collection process must be improved

Also, the company has to perform well and maintain a high goodwill in order to raise its market price per share.

APPENDIX – CALCULATIONS:

I have only mentioned a few important calculations only. The values of rest are easily identifiable.

• Cost of goods sold = materials + labor + heat, light & power
• EBIT(i-t) = 70000*(1 – 0.40) = 70000*(0.60) = 42000
• Total capital = common equity + long-term debt
• Book value per share = Face value per share = (Common Equity / no. of shares)
• Enterprise value = (Market Capitalisation + Debt) – Total Cash & Cash Equivalents
• EBITDA = EBIT + Depreciation