Comprehensive Ratio Analysis Data for Lozano Chip Company and its industry avera

Question

Comprehensive Ratio Analysis

Data for Lozano Chip Company and its industry averages follow.

Lozano Chip Company: Balance Sheet as of December 31, 2013 (Thousands of Dollars)

Lozano Chip Company: Income Statement for Year Ended December 31, 2013 (Thousands of Dollars)

Cash $  225,000 Accounts payable $601,866 Receivables 1,575,000 Notes payable 326,634 Inventories 1,125,000 Other current liabilities 525,000   Total current assets $2,925,000   Total current liabilities $1,453,500 Net fixed assets 1,350,000 Long-term debt 1,068,750 Common equity 1,752,750 Total assets $4,275,000 Total liabilities and equity $4,275,000

Explanation / Answer

1 Calculate the indicated ratios for Lozano. Round your answers to two decimal places. Ratio       Lozano Industry Average Current assets/Current liabilities 2.01 2 Days sales outstanding*            76.65 35.0 days COGS/Inventory 5.67 6.7 Sales/Fixed assets               5.56 12.1 Sales/Total assets 1.75 3 Net income/Sales 1.51% 1.20% Net income/Total assets 2.64% 3.60% Net income/Common equity 6.45% 9.00% Total debt/Total assets 59.00% 30.00% Total liabilities/Total assets 34.00% 60.00% *Calculation is based on a 365-day year. 2 extended Du Pont equation for both Lozano ROE = PM * TATO *EM EM= TOTAL ASSESTS/EQUITY 6.45%= 1.51% * 1.75* 2.44 EM= 4275000/1752750 EM= 2.44 extended Du Pont equation for INDUSTRY ROE = PM * TATO *EM 9.00%=1.20% *3 * 2.5 3 Lozano's daily outstanding is more than twice as long as the industry average which may indicate that the firm is financing a great deal of its sales through its account receivable. Lozano should consider tightening its credit policy and instituting better collection policies. The total turnover ratio is below the industry average indicating higher assests levles per unit of sales. Lozano should seek to address the issue by increasing sales or /and decreasing assests particularly in the area of A/R. Note though there may be a trade off. Tighten credit may decrease A/R but it is likely to decrease sales. On the other hand if higher sales is due to customers who represent bad debt loss. These sales ultimately reduces the company earnings. Lozano has a higher profit margin but when looking at the dupont equations it is apparent that this advantages is lost dut to higher level of assests than the industry average.

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