Data for Barry Computer Co. and its industry averages follow.a. Calcul

QUESTION

Data for Barry Computer Co. and its industry averages follow.a. Calculate the indicated ratios for Barry.b. Construct the DuPont equation for both Barry and the industry.c. Outline Barrys 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 2008. How would that information affect the validity of your ratio analysis?
Solution: (a) Indicated Ratio for Barry Ratio Barry Computer Industry Average Current Ratio Current Assets/Current Liabilities $655000 / $330000 = 1.98 x 2.0 x Days Sales Outstanding Account Receivables/(Sales/360) $336000 / $4465.28 = 75 Days 35 Days Inventory Turnover Sales/Inventories $1607500 / $241500 = 6.66 x 6.7 x Total Asset Turnover Sales/Total Assets $1607500 / $947500 = 1.70 x 3 x Net Profit Margin Net Income / Sales $27300 / $1607500= 1.7% 1.2% ROA Net Income / Total Assets $27300 / $947500= 2.9% 3.6% ROE Net Income / Common Equity $27300 / $361000= 7.6% 9% Debt Ratio Total Debt / Total Assets $586500 / $947500 = 61.9% 60.0% (b) DuPont Equations for Barry According to DuPont equation: Return on Equity (ROE) = Return on Asset*Equity Multiplier ROA = Profit Margin*Total Asset Turnover ROA = ($27300 / $1607500) * ($1607500 / $947500) ROA = 0.0170 * 1.6966 ROA = 2.88% ROE = ROA*Equity Multiplier ROE = (Net Income / Total Assets) * (Total Assets / Common Equity) ROE = 2.88% * ($947500 / $361000) ROE = 7.56% Du Pont Equations for Industry: ROA= (1.2%) * (3.0) = 3.6% ROE = ROA*Equity Multiplier ROE = 3.6% * (1 / (1 “ 0.6)) ROE = 3.6% * 2.5 = 9% (c) Barrys days sales outstanding are more than twice as long as the industry average which indicates that the company should tighten its credit and collection policy¦.

Since the companys assets turnover ratio is less than the industry average, the firm must seek to decrease its assets or increase sales or both. While Barrys profit margin is higher than the industry average and its other profitability ratios are also low as compare to the industry, profit margin being the exception. Net income should be higher given the amount of sales, equity, and assets. Therefore, Barry Computer seems to be in an average liquidity position and financial leverage is similar to other companies in the industry. (d) If Barry had doubled its sales as well as its inventories, accounts receivable, and common equity during 2008, the ratios of the year will be distorted and a comparison between them and industry averages would have little meaning. Potential investors who look only at 2008 ratios will be misled and it could hurt the companys stock price.

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