# Finance

RATIO ANALYSIS 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.

a. Calculate the indicated ratios for Barry.

b. Construct the DuPont equation for both Barry and the industry.

c. Outline Barry’s strengths and weaknesses as revealed by your analysis.

d. Suppose Barry had doubled its sales as well as its inventories, accounts receivable, and common equity during 2018. 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.)

 Barry Computer Company: Balance Sheet as of December 31, 2018 (in Thousands) Cash \$ 77,500 Accounts payable \$129,000 Receivables 336,000 Other current liabilities 117,000 Inventories 241,500 Notes payable to bank 84,000 Total current assets \$ 655,000 Total current liabilities \$330,000 Long-term debt 256,500 Net fixed assets 292,500 Common equity (36,100 shares) 361,000 Total assets \$ 947,500 Total liabilities and equity \$947,500

 Barry Computer Company: Income Statement for Year Ended December 31, 2018 (in Thousands) Sales \$1,607,500 Cost of goods sold Materials \$717,000 Labor 453,000 Heat, light, and power 68,000 Indirect labor 113,000 Depreciation 41,500 1,392,500 Gross profit \$ 215,000 Selling expenses 115,000 General and administrative expenses 30,000 Earnings before interest and taxes (EBIT) \$ 70,000 Interest expense 24,500 Earnings before taxes (EBT) \$ 45,500 Federal and state income taxes (40%) 18,200 Net income \$ 27,300 Earnings per share \$ 0.75623 Price per share on December 31, 2018 \$ 12.00

 Ratio Barry Industry Average Current ___ 2.0× Quick ___ 1.3× Days sales outstanding a ___ 35 days Inventory turnover ___ 6.7× Total assets turnover ___ 3.0× Profit margin ___ 1.2% ROA ___ 3.6% ROE ___ 9.0% ROIC ___ 7.5% TIE ___ 3.0× Debt/Total capital ___ 47.0% M/B ___ 4.22 P/E ___ 17.86 EV/EBITDA ___ 9.14 a Calculation is based on a 365-day year.

4-24 DuPONT ANALYSIS A firm has been experiencing low profitability in recent years. Perform an analysis of the firm’s financial position using the DuPont equation. The firm has no lease payments but has a \$2 million sinking fund payment on its debt. The most recent industry average ratios and the firm’s financial statements are as follows:

 Industry Average Ratios Current ratio 3× Fixed assets turnover 6× Debt-to-capital ratio 20% Total assets turnover 3× Times interest earned 7× Profit margin 3% EBITDA coverage 9× Return on total assets 9% Inventory turnover 10× Return on common equity 12.86% Days sales outstanding a 24 days Return on invested capital 11.50% a Calculation is based on a 365-day year.

 Balance Sheet as of December 31, 2018 (Millions of Dollars) Cash and equivalents \$ 78 Accounts payable \$ 45 Accounts receivable 66 Other current liabilities 11 Inventories 159 Notes payable 29 Total current assets \$303 Total current liabilities \$ 85 Long-term debt 50 Total liabilities \$135 Gross fixed assets 225 Common stock 114 Less depreciation 78 Retained earnings 201 Net fixed assets \$147 Total stockholders’ equity \$315 Total assets \$450 Total liabilities and equity \$450

 Income Statement for Year Ended December 31, 2018 (Millions of Dollars) Net sales \$795.0 Cost of goods sold 660.0 Gross profit \$135.0 Selling expenses 73.5 EBITDA \$ 61.5 Depreciation expense 12.0 Earnings before interest and taxes (EBIT) \$ 49.5 Interest expense 4.5 Earnings before taxes (EBT) \$ 45.0 Taxes (40%) 18.0 Net income \$ 27.0

a. Calculate the ratios you think would be useful in this analysis.

b. Construct a DuPont equation, and compare the company’s ratios to the industry average ratios.

c. Do the balance sheet accounts or the income statement figures seem to be primarily responsible for the low profits?

d. Which specific accounts seem to be most out of line relative to other firms in the industry?

e. If the firm had a pronounced seasonal sales pattern or if it grew rapidly during the year, how might that affect the validity of your ratio analysis? How might you correct for such potential problems?

The following will hopefully help you with your Du Ponts:

First , please note that the third and last ratio of the Du Pont equation (p. 124) is Total Assets/Total Common Equity. This ratio is what we refer to as the “Equity Multiplier.” People often get confused about the denominator in this ratio. If you look at Table 3-1 on page 68, you will see that Total Common Equity is the TOTAL of the common stock and retained earnings. For the company that number is \$940mm. Now, go back to the Du Pont on page 124 and look at the equity multiplier. They use that same \$940mm. They do not just use the “common stock” number.

Now, look at problem 4-24 where they use some slightly different wording. It shows that “total stockholder equity” = \$315mm. That is your number for the Du Pont. It is a common (no pun intended!) error for learners to think “total common equity” (for the DuPont)? That must mean “Common stock”! They then use only the \$114mm instead of the total \$315mm and incorrectly calculate the Du Pont.

Second,  remember (read page 124) that the Du Pont should calculate the very same number that you derive by calculating the ROE ratio. Du Pont does not give you a different ROE, it helps you understand more about that same number (such as, why is the ratio the way it is). So, if your ROE ratio and your Du Pont are different, you have an error somewhere in either your ratio or your equation.

Third,  here is a major hint on how to calculate the industry Du Pont in 4-23(b):

To get the EM for the industry, recognize that ROE/ROA = (NI/E)/(NI/A) = NI/E × A/NI = A/E = Equity multiplier = 2.5.

I hope all this helps!

Thanks

RATIO ANALYSIS

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.

a.

Calculate the indicated ratios for Barry.

b.

Construct the DuPont equation for both Barry and the industry.

c.

Outline Barry’s strengths and weaknesses as revealed by your analysis.

d.

Suppose Barry had doubled its sales as well as its inventories, accounts receivable, and

common equity during 2018. 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.)

Barry Computer Company: Balance Sheet as of December 31, 2018 (in Thousands)

Cash

\$ 77,500

Accounts payable

\$129,000

Receivables

336,000

Other current liabilities

117,000

Inventories

241,500

Notes payable to bank

84,000

Total current assets

\$ 655,000

Total current liabilities

\$330,000

Long

term debt

256,500

Net fixed assets

292,500

Common equity (36,100 shares)

361,000

Total assets

\$ 947,500

Total liabilities and equity

\$947,500

Barry Computer Company: Income Statement for Year Ended December 31, 2018 (in

Thousands)

Sales

\$1,607,500

Cost of goods sold

Materials

\$717,000

Labor

453,000

Heat, light, and power

68,000

Indirect labor

113,000

Depreciation

41,500

1,392,500

Gross profit

\$ 215,000

Selling expenses

115,000

General and administrative expenses

30,000

Earnings before interest and taxes (EBIT)

\$ 70,000

Interest expense

24,500

Earnings before taxes (EBT)

\$ 45,500

Federal and state income taxes (40%)

18,200

Net income

\$ 27,300

Earnings per share

\$ 0.75623

RATIO ANALYSIS 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.

a. Calculate the indicated ratios for Barry.

b. Construct the DuPont equation for both Barry and the industry.

c. Outline Barry’s strengths and weaknesses as revealed by your analysis.

d. Suppose Barry had doubled its sales as well as its inventories, accounts receivable, and

common equity during 2018. 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.)

Barry Computer Company: Balance Sheet as of December 31, 2018 (in Thousands)

Cash \$ 77,500 Accounts payable \$129,000

Receivables 336,000 Other current liabilities 117,000

Inventories 241,500 Notes payable to bank 84,000

Total current assets \$ 655,000 Total current liabilities \$330,000

Long-term debt 256,500

Net fixed assets 292,500 Common equity (36,100 shares) 361,000

Total assets \$ 947,500 Total liabilities and equity \$947,500

Barry Computer Company: Income Statement for Year Ended December 31, 2018 (in

Thousands)

Sales

\$1,607,500

Cost of goods sold

Materials \$717,000

Labor 453,000

Heat, light, and power 68,000

Indirect labor 113,000

Depreciation 41,500 1,392,500

Gross profit

\$ 215,000

Selling expenses

115,000

General and administrative expenses

30,000

Earnings before interest and taxes (EBIT)

\$ 70,000

Interest expense

24,500

Earnings before taxes (EBT)

\$ 45,500

Federal and state income taxes (40%)

18,200

Net income

\$ 27,300

Earnings per share

\$ 0.75623

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