Baldwin Industries, a manufacturer of construction equipment, is considering the purchase of KayNet Cables, one of its suppliers. Baldwin’s board of directors has given preliminary approval for the purchase, and several discussions have taken place between the management of the two companies. In preparation for the discussions, KayNet provided its financial data for the past three years and its financial forecasts for the next three years. Baldwin’s controller, Nora Jaynes, has analyzed KayNet’s data and prepared the following ratio analysis, which compares KayNet’s performance with the industry averages.

Required

a. Assess KayNet’s liquidity, citing strengths or problems.

b. Assess KayNet’s profitability, citing strengths or problems.

c. Assess KayNet’s leverage, citing strengths or problems.

d. Assess KayNet’s market position, citing strengths or problems.

e. Based on your assessment, do you recommend that Baldwin go forward with its acquisition of KayNet? Why or why not?

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Industry Average 2020 2019 2018 Return on assets 13.03% 13.02% 12.98% 12.96% Average days to sell inventory 51.16 days 47.29 days 42.15 days 3.28 44.63 days Times interest earned ratio 3.87 3.46 3.56 Price/earnings ratio Debt-to-equity ratio 10.96 11.23 11.39 11.54 49.66 46.32 48.24 57.14 Accounts receivable turnover 6.98 7.23 7.83 7.78 Current ratio 2.05 2.35 2.10 2.30 Gross margin 30.11 30.18 29.67 29.85