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.

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

Balance Sheet ($000)	Carson Electronics, Inc.	BGT Electronics, Inc.
Cash	$2,020	$1,490
Accounts receivable	4490	6020
Inventories	1500	2510
Current assets	$8,010	$10,020
Net fixed assets	16030	24990
Total assets	$24,040	$35,010
Accounts payable	$2,490	$5,000
Accrued expenses	960	1480
Short-term notes payable	3550	1530
Current liabilities	$7,000	$8,010
Long-term debt	8050	3960
Owners' equity	8990	23040
Total liabilities and owners' equity	$24,040	$35,010
Income Statement ($000)	Carson Electronics, Inc.	BGT Electronics, Inc.
Net sales (all credit)	$47,970	$70,000
Cost of goods sold	(35,960)	(42,010)
Gross profit	$12,010	$27,990
Operating expenses	(8,000)	(11,960)
Net operating income	$4,010	$16,030
Interest expense	(1,180)	(520)
Earnings before taxes	$2,830	$15,510
Income taxes (40%)	(1,132)	(6,204)
Net income	$1,698	$9,306

.

Answer 1

In comparison with BGT, carson has the following weakness they can improve -

1. Lower return margins ( operating , net profit margin ) - This is due to high COGS in Carson's (74%) of sales as compared to 60% of sales by BGT, which affects the operating an net profit. The net profit of Carson is only 3.5% of sales while BGT is 13.29% . Low profit is due to higher interest expense and COGS in Carsons.

2. High leverage (Debt ) - Carson has a much higher debt ratio of 33.486% as compared to BGT (11.31%) due to a higher debt proportion in comparison to equity. Due to the sheer higher debt, Carson also has higher interest expenses compared to the BGT affecting their net profits. The interest coverage ratio , which shows how much of the interest can be covered through their profit is much lesser for Carson (3.713%) as compared to BGT (30.827%)