Question

Problem 3-13 Comprehensive Ratio Analysis Data for Lozano Chip Company and its industry averages follow. Lozano Chip Company: Balance Sheet as of December 31, 2016 (Thousands of Dollars) Cash $ 225,000 Accounts payable $601,866 Receivables 1,575,000 Notes payable 326,634 Inventories 1,125,000 Other current liabilities 525,000 Total current assets $2,925,000 Total current liabilities $1,453,500 Net fixed assets 1,350,000 Long-term debt 1,068,750 Common equity 1,752,750 Total assets $4,275,000 Total liabilities and equity $4,275,000 Lozano Chip Company: Income Statement for Year Ended December 31, 2016 (Thousands of Dollars) Sales $7,500,000 Cost of goods sold 6,375,000 Selling, general, and administrative expenses 825,000 Earnings before interest and taxes (EBIT) $ 300,000 Interest expense 111,631 Earnings before taxes (EBT) $ 188,369 Federal and state income taxes (40%) 75,348 Net income $ 113,022

Answer 1

Current ratio for LOZANO is ,

= Current assets/ current liabilities

= $2,925,000 / $1,453,500

= 2.0124

Days sales outstanding :

= Accounts receivables/ sales * 365

= $1,575,000/ $75,00,000 * 365

= 76.65 days

COGS/ Inventory

= $6,37,5000 /$11,25,000

= 5.6667

Sales/ fixed assets

= $75,00,000 / $1,350,000

= 5.5556

Sales/ total assets

= $75,00,000 / $4,275,000

= 1.7544

Net income/ sales

=$113,022/ $75,00,000

= 1.507%

Net income/ total assets

= $113,022/ $4,275,000

= 2.6438%

net income / equity

= $113,022/ $1,752,750

= 6.4483%

Total debt/ total assets

= $1,068,750 / $4,275,000

= 25 %

total liabilities/ total assets

= $$2,522,250/ $4,275,000

= 59%

ROE for the firm:

= Net income/ equity

= $113,022/ $1,752,750

= 6.4483%

We can calculate the ROE for Industry , Du- Pont analysis,

= Net income/ sales * sales/ total assets * assets/ equity

= 1.2% * 3% * 1/3.6 * 9

= 9%

C. Lozano has the same liquidity ratio as the industry. It has a very long days sale outstanding, which indicates that the accounts receivables are recovered after a long time of 75 days, which is a weakness. Its turnover ratios are also below the industry , which is a weakness. Its profitability ratios are also below the industry average, which is again a weakness of Lozano. The debt ratios are below, the industry which is a strenght. It is not highly leveraged in comparison with the industry. It's ROE is also below the industry, indicating another weakness.