Question

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 dollars are in thousands, number of shares are shown in thousands too.

Barry Computer Company:
Balance Sheet as of December 31, 2019 (In Thousands)
Cash	$	93,800		Accounts payable	$	150,080
Receivables		234,500		Other current liabilities		93,800
Inventories		206,360		Notes payable to bank		93,800
Total current assets	$	534,660		Total current liabilities	$	337,680
				Long-term debt		234,500
Net fixed assets		403,340		Common equity (36,582 shares)		365,820
Total assets	$	938,000		Total liabilities and equity	$	938,000

Barry Computer Company: Income Statement for Year Ended December 31, 2019 (In Thousands)
Sales			$	1,400,000
Cost of goods sold
Materials	$686,000
Labor	280,000
Heat, light, and power	56,000
Indirect labor	70,000
Depreciation	42,000			1,134,000

Gross profit		$	266,000
Selling expenses			168,000
General and administrative expenses			28,000
Earnings before interest and taxes (EBIT)		$	70,000
Interest expense			23,450
Earnings before taxes (EBT)		$	46,550
Federal and state income taxes (25%)			11,638
Net income		$	34,912
Earnings per share		$	0.9543
Price per share on December 31, 2019		$	11.00

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

   Ratio	Barry	Industry Average
   Current	×	1.51	×
   Quick	×	0.94	×
   Days sales outstandinga	days	29	days
   Inventory turnover	×	6.98	×
   Total assets turnover	×	1.65	×
   Profit margin	%	2.37	%
   ROA	%	3.92	%
   ROE	%	10.15	%
   ROIC	%	8.00	%
   TIE	×	2.94	×
   Debt/Total capital	%	48.80	%
   M/B		3.10
   P/E		14.14
   EV/EBITDA		8.64

   
   ^aCalculation is based on a 365-day year.
   
2. Construct the DuPont equation for both Barry and the industry. Do not round intermediate calculations. Round your answers to two decimal places.

   	FIRM	INDUSTRY
   Profit margin	%	2.37%
   Total assets turnover	×	1.65×
   Equity multiplier	×	×

3. Select the correct option based on Barry's strengths and weaknesses as revealed by your analysis.
   1. The firm's days sales outstanding ratio is more than the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well above the industry average so sales should be increased, assets increased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity, assets, and invested capital. However, the company seems to be in an above average liquidity position and financial leverage is similar to others in the industry.
   2. The firm's days sales outstanding ratio is comparable to the industry average, indicating that the firm should neither tighten credit nor enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets increased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity, assets, and invested capital. However, the company seems to be in a below average liquidity position and financial leverage is similar to others in the industry.
   3. The firm's days sales outstanding ratio is more than twice as long as the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets decreased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity, assets, and invested capital. Finally, it's market value ratios are also below industry averages. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry.
   4. The firm's days sales outstanding ratio is more than twice as long as the industry average, indicating that the firm should loosen credit or apply a less stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets increased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity, assets, and invested capital. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry.
   5. The firm's days sales outstanding ratio is less than the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets decreased, or both. While the company's profit margin is lower than the industry average, its other profitability ratios are high compared to the industry - net income should be higher given the amount of equity, assets, and invested capital. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry.
   -Select-IIIIIIIVVItem 19
4. Suppose Barry had doubled its sales as well as its inventories, accounts receivable, and common equity during 2019. 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.)
   1. If 2019 represents a period of supernormal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have substantial meaning. Potential investors who look only at 2019 ratios will be well informed, and a return to normal conditions in 2020 could hurt the firm's stock price.
   2. If 2019 represents a period of supernormal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have little meaning. Potential investors who look only at 2019 ratios will be misled, and a return to normal conditions in 2020 could hurt the firm's stock price.
   3. If 2019 represents a period of supernormal growth for the firm, ratios based on this year will be accurate and a comparison between them and industry averages will have substantial meaning. Potential investors need only look at 2019 ratios to be well informed, and a return to normal conditions in 2020 could help the firm's stock price.
   4. If 2019 represents a period of normal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have little meaning. Potential investors who look only at 2019 ratios will be misled, and a continuation of normal conditions in 2020 could hurt the firm's stock price.
   5. If 2019 represents a period of normal growth for the firm, ratios based on this year will be accurate and a comparison between them and industry averages will have substantial meaning. Potential investors who look only at 2019 ratios will be misled, and a return to supernormal conditions in 2020 could hurt the firm's stock price.

Answer 1

a.

Ratio		Barry	Industry Average
Current	Current Assets / Current Liabilities	1.58 x	1.51	x
Quick	( Cash + Accounts Receivables ) / Current Liabilities	0.97 x	0.94	x
Days Sales Outstanding	( 365 / Sales ) * Accounts Receivable	61.14 daya	29	days
Inventory turnover	Cost of Goods Sold / Inventory	5.50 x	6.98	x
Total assets turnover	Sales / Total Assets	1.49 x	1.65	x
Profit Margin	Net Income / Sales	2.49 %	2.37	%
Return on Assets	Net Income / Total Assets	3.72 %	3.92	%
ROE	Net Income / Common Equity	9.54 %	10.15	%
ROIC	( EBIT) * ( 1 - t ) / ( Long Term Liabilities + Common Equity )	8.75 %	8	%
TIE	EBIT / Interest Expense	2.99 x	2.94	x
M/B	Current Stock Price / Book Value	1.10	3.10
P/E	Current Stock Price / Earnings per Share	11.53	14.14

b.

	Firm	Industry
Profit Margin	2.49 %	2.37 %
Total Asset Turnover	1.49 x	1.65 x
Equity Multiplier	2.57	2.60

c. III. The firm's days sales outstanding ratio is more than twice as long as the industry average, indicating that the firm should tighten credit or enforce a more stringent collection policy. The total assets turnover ratio is well below the industry average so sales should be increased, assets decreased, or both. While the company's profit margin is higher than the industry average, its other profitability ratios are low compared to the industry - net income should be higher given the amount of equity, assets, and invested capital. Finally, it's market value ratios are also below industry averages. However, the company seems to be in an average liquidity position and financial leverage is similar to others in the industry.

d. II. If 2019 represents a period of supernormal growth for the firm, ratios based on this year will be distorted and a comparison between them and industry averages will have little meaning. Potential investors who look only at 2019 ratios will be misled, and a return to normal conditions in 2020 could hurt the firm's stock price.