Question

Comprehensive Ratio Analysis

Data for Lozano Chip Company and its industry averages follow.

Lozano Chip Company: Balance Sheet as of December 31, 2019 (Thousands of Dollars)
Cash	$   220,000		Accounts payable	$   600,000
Receivables	1,575,000		Notes payable	100,000
Inventories	1,140,000		Other current liabilities	545,000
Total current assets	$2,935,000		Total current liabilities	$1,245,000
Net fixed assets	1,335,000		Long-term debt	400,000
			Common equity	2,625,000
Total assets	$4,270,000		Total liabilities and equity	$4,270,000

Lozano Chip Company: Income Statement for Year Ended December 31, 2019 (Thousands of Dollars)
Sales	$7,500,000
Cost of goods sold	6,375,000
Selling, general, and administrative expenses	933,000
Earnings before interest and taxes (EBIT)	$   192,000
Interest expense	40,000
Earnings before taxes (EBT)	$   152,000
Federal and state income taxes (25%)	38,000
Net income	$   114,000

Calculate the indicated ratios for Lozano. Do not round intermediate calculations. Round your answers to two decimal places.

Ratio	Lozano	Industry Average
Current assets/Current liabilities		2.0
Days sales outstanding (365-day year)	days	35.0	days
COGS/Inventory		6.7
Sales/Fixed assets		12.1
Sales/Total assets		3.0
Net income/Sales	%	1.2	%
Net income/Total assets	%	3.6	%
Net income/Common equity	%	9.0	%
Total debt/Total assets	%	10.0	%
Total liabilities/Total assets	%	60.0	%

1. Use the extended DuPont equation to calculate ROE for both Lozano and the industry. Do not round intermediate calculations. Round your answers to two decimal places.

   For the firm, ROE is   %.

   For the industry, ROE is   %.

2. Outline Lozano's strengths and weaknesses as revealed by your analysis.

   The firm's days sales outstanding is more than twice as long as the industry average, indicating that the firm should -Select-slackentightenItem 13 credit or enforce a -Select-morelessItem 14 stringent collection policy.

   The total assets turnover ratio is well -Select-abovebelowItem 15 the industry average so sales should be -Select-decreased/increased Item 16 , assets -Select-decreased/increased Item 17 , or both.

   While the company's profit margin is -Select-higher/lower Item 18 than the industry average, its other profitability ratios are -Select-high/low Item 19 compared to the industry - net income should be -Select-higher/lower Item 20 given the amount of equity and assets.

Answer 1

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H et e w x ENG 06-17 21-05-2020 15 B 26 X FA383 fx ES EU EV EW EX EY EZ FA FB- ET LOZANO 365 366 367 a 368 369 370 371 372 373 374 375 376 377 378 379 b 380 CURRENT ASSETS/CURRENT LIABILTIIES DAYS SALES OUTSTANDING COGS/INVENTORY SALES/FIXED ASSETS SALES/TOTAL ASSETS NET INCOME/SALES NET INCOME/TOTAL ASSETS NET INCOME/COMMON EQUITY TOTAL DEBT/TOTAL ASSETS TOTAL LIABILITIES/TOTAL ASSETS 2935000/1245000 365 DAYS X 1575000/7500000 6375000/1140000 7500000/1335000 7500000/4270000 114000/7500000 114000/4270000 114000/2625000 (400000+ 100000)/4270000 (1245000 + 400000)/4270000 2.36 76.65 (365 DAYS X ACCOUNTS RECEIVABLE/SALES] 5.59 5.62 1.76 1.52% 2.67% 4.34% 11.71% [(LONG TERM DEBT + NOTES PAYABLE)/TOTAL ASSETS 38.52% ROE = NET PROFIT MARGIN X TOTAL ASSETS TURNOVER X EQUITY MULTIPLIER NET INCOME/SALES X SALES/TOTAL ASSETS X (1/(1- TOTAL LIABILITIES/TOTAL ASSETS)) FOR FIRM 1.52% X 1.76 X (1/(1-0.3821)) = 4.34% FOR INDUSTRY 1.2% X 3 X (1/(1-0.60)) = 9.00% 381 382 383 384 385 C 386 387 388 FIRM SHOULD TIGHTEN CREDIT .......... MORE STRINGENT COLLECTION POLICY BELOW THE INDUSTRY AVERAGE ... SO SALES SHOULD BE INCREASED, ASSETS SHOULD BE DECREASED OR BOTH ABOVE THE INDUSTRY AVERAGE ... OTHER PROFITABILITY RATIOS ARE LOWER THAN ..... NET INCOME SHOULD BE INCREASED FIFO CASH BUDGET budget 45 days cycle MCE | ROE, BV MV ratio VARIANCE BEP, OL FL ratios DETROIT float B-S profit loss SALES BUDGE...