Ratio Analysis, marketing homework help

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Business Finance

Description

Problem 4-23
Ratio Analysis

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

Barry Computer Company:

Balance Sheet as of December 31, 2015 (In Thousands)

Cash

$77,500

Accounts payable

$129,000

Receivables

336,000

Other current liabilities

117,000

Inventories

241,500

Notes payable

84,000

 Total current assets

$655,000

 Total current liabilities

$330,000

Long-term debt

$256,500

Net fixed assets

292,500

Common equity

361,000

Total assets

$947,500

Total liabilities and equity

$648,000

Barry Computer Company:
Income Statement for Year Ended December 31, 2015(In Thousands)

Sales

$1,607,500

Cost of goods sold

 Materials

$717000

 Labor

453,000

 Heat, light, and power

68,000

 Indirect labor

113,000

 Depreciation

41,500

$1,39,500

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

Calculate the indicated ratios for Barry. Round your answers to two decimal places.

Ratio

Barry

Industry Average

Current

x

2.0x

Quick

x

1.3x

Days sales outstandinga

days

35days

Inventory turnover

x

6.7x

Total assets turnover

x

3.0x

Profit margin

%

1.2%

ROA

%

3.6%

ROE

%

9.0%

ROIC

%

7.5%

TIE

x

3.0x

Debt/Total capital

%

47.0%

Application: Using Ratio Analysis To Inform Organizational Decisions

The Assignment: Barry Computer Company

Prepare a performance report on Barry Computer Company. (Problem 4-23 on pages 131-132 of the course text provides a balance sheet and an income statement for the company.)

  • Prepare your performance report to show calculations for the eleven ratios listed on page 131-132, as well as a comparison of your computed ratios with the listed industry averages.
  • Write a short memo to your supervisor explaining your findings and your recommendations for improvement.
  • Suggest some ways in which the company can plan to improve below industry average ratio performance.
  • Explain why your recommendations would be effective.  
  • Be sure to list your computations in an appendix to your report.

General Guidance on Application Length:

The memo portion of this assignment will typically be 2 pages in length as a general expectation/estimate. You can show your calculations of financial ratios in a supplemental appendix to your memo. Refer to the rubric for the Week 2 Assignment for grading elements and criteria for the assignment. Your Instructor will use the rubric to assess your work.

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Explanation & Answer

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1
RUNNING HEAD: RATIO ANALYSIS OF BARRY COMPUTER COMPANY

We have used the financial ratios method to evaluate the performance of Barry Computer
Company. Financial ratios are helpful when determining the company profitability, short and
long term liquidity and to check the performance against set standards. The results from the
ratios are compared with the industry average and based upon findings of the results we conclude
that the performance of the company is below against the industry average. (Appendix)
The results from the current asset and quick ratio show that the company is enjoying
strong short term liquidity position and the result of these ratios are similar to the industry
average but the company needs to increase the worth of current assets so that it does not face the
problem of liquidity in near future.
The company credit policy is not effective and there is a need to redefine the credit terms.
The result from the daily outstanding sales shows 76 days while the industry average is 35 days.
The company’s collection period is relatively low which may result in bad debt and other losses.
The inventory turnover ratio is below the industry average. The inventory turnover ratio
of the company is quite low as compared to industry average which means company’s current
funds are tied up in the inventory. The inventory turnover ratio suggests the times the inventory
is converted to sales.
The asset turnover ratio of the company is 2 against the industry average of 3. The
company needs to improve its efficiency so that assets can be better utilized to generate more
revenue for the company. Asset turnover ratio shows the efficiency of the company to utilize its
assets to generate sales.

2
RATIO ANALYSIS OF BARRY COMPUTER COMPANY

The company has net profit margin of 1.70% which is higher than the industry average
which is a positive sign for the company. The company can further improve its profitability by
having more control over its expenses.
The company is having return on assets of 2.9% against the 3.6% as per industry. The
company needs to work on the efficiency of utilizing its assets so that more earnings can be
generated.
The return on equity is 8% against the industry average of 9%. The company should
generate more earnings so that higher return can be given to the shareholders and potential
investors will also be attracted.
Return on capital employed of the company is same as return on assets as it has no
dividend and no additional capital invested. The ratio of industry is quite high as compared to
company’s return on capital employed.
Time Interest earned ratio shows the ability of the company to cover its interest expenses
with the earnings. In other words it is the ratio which shows the extent to which interest is
covered by earnings before interest and tax. The Interest coverage ratio of the company is 3
times which meets the industry norm and thus its shows that company is efficient in covering its
interest cost.
The debt to capital ratio sows the leverage of the company. It shows the extent to which
the capita of the company is financed from outside sources. The higher the ratio, higher is the
outside dependency. The company’s debt ratio is quite high as compared to the industry norm.
The total debt forms 62% of total capital of the company....


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