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%