Question

(Financial statement analysis) Carson Electronics' management has long viewed BGT Electronics as an industry leader and uses this firm as a model firm for analyzing its own performance. The balance sheets and income statements for the two firms are found here: a. Calculate the following ratios for both Carson and BGT: Current ratio Times interest earned Inventory turnover Total asset turnover Operating profit margin Operating return on assets Debt ratio Average collection period Fixed asset turnover Return on equity b. Analyze the differences you observe between the two firms. Comment on what you view as weaknesses in the performance of Carson as compared to BGT that Carson's management might focus on to improve its operations. a. Calculate the following ratios for both Carson and BGT: Carson's current ratio is (Round to two decimal places.)

Answer 1

a)	Calculation of ratios
	Current ratio= Current assets/Current liabilities
	Carson	7960/7050
		1.13
	BGT	10030/7940
		1.26
	Times interest earned=Earnings before interest and taxes/Total interest expense
	Carson	3970/1130
		3.51
	BGT	16000/560
		28.57
	Inventory turnover=Cost of goods sold/Average inventories
	* since opening inventory balance is not given, we have assumed closing inventory to be average inventory
	Carson	35990/1490
		24.15
	BGT	42040/2550
		16.49
	Total assets turnover= Net sales/Total assets
	Carson	48010/23920
		2.01
	BGT	70030/35050
		2.00
	Operating profit margin=(Operating profit/Net sales)*100
	Carson	(3970/48010)*100
		8.27%
	BGT	(16000/70030)*100
		22.85%
	Operating return on assets=(Operating profit/Total assets)*100
	Carson	(3970/23920)*100
		16.60%
	BGT	(16000/35050)*100
		45.65%
	Return on assets= (Net income/Total assets)*100
	Carson	(1704/23920)*100
		7.12%
	BGT	(9264/35050)*100
		26.43%
	Debt ratio=Total liabilities/Total assets
	Carson	((7050+7990)/23920)
		0.63
	BGT	((7940+3970)/35050)
		0.34
	Average collection period=(365*average account receivables)/Net credit sales
	* since opening account receivables balance is not given, we have assumed closing receivables to be average receivables
	Carson	(365*4470)/48010
		34 days
	BGT	(365*5970)/70030
		31 days
	Fixed assets turnover= Net sales/Average fixed assets
	* since opening fixed assets balance is not given, we have assumed closing fixed assets to be average fixed assets
	Carson	48010/15960
		3.01
	BGT	70030/25020
		2.80
	Return on equity= (Net income/Shareholders equity)*100
	Carson	(1704/8880)*100
		19.19%
	BGT	(9264/23140)*100
		40.03%
b)	Weakness in performance of Carson as compared to BGT
i)	The current ratio of Carson though is greater than the benchmark of 1 but is comparatively less than BGT implying less liquidity position
ii)	The times interest earned is very less in comparison to BGT implying that it may face problems in servicing its debt obligations
iii)	The operating profit margin is comparatively very less in comparison to BGT implying Carson's inefficiency of controlling costs and expenses associated with business operations
iv)	The return on assets is very low implying management's inability to use assets in generating income
v)	The return on equity is very low implying management's inability to use shareholders fund in more profitable/rewarding avenues