Question

Data for Barry Computer Co. and its industry averages follow. The firm's debt is priced at...

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.

Homework Answers

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.

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