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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.

4-23

RATIO ANALYSIS 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 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 2015. 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, 2015 (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

361,000

Total assets

$947,500

Total liabilities and equity

$947,500

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

aCalculation is based on a 365-day year.

Ratio

Barry

Industry Average

ROA

_____

3.6%

ROE

_____

9.0%

ROIC

_____

7.5%

TIE

_____

3.0×

Debt/Total capital

_____

47.0%

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