Cengage Darry computer company Balance Sheet as of December 31, 2014 (In Thousan
ID: 2792938 • Letter: C
Question
Cengage Darry computer company Balance Sheet as of December 31, 2014 (In Thousands) Cash Receivables Inventories $67,200 248,640 194,880 $510,720 Accounts payable Other current liabilities Notes payable $100,800 80,640 73,920 $255,360 Total current assets Total current liabilities Long-term debt Common equity Total liabilities and equity $154,560 262,080 $672,000 Net fixed assets 161,280 Total assets $672,000 Barry Computer Company Income Statement for Year Ended December 31, 2014 (In Thousands) Sales $1,200,000 Cost of goods sold Materials Labor Heat, light, and power Indirect labor Depreciation $528,000 360,000 48,000 60,000 60,000 $1,056,000 $144,000 96,000 24,000 $24,000 12,365 Gross profit Selling expenses General and administrative expenses Earnings before interest and taxes (EBIT)Explanation / Answer
Ans.A) Current Ratio - Current Asset/Current Liability 510,720/255,360= 2
Quick Ratio= Cash & Cash Equivalent / Current Liability 67,200/255,360= .2631
Days of sales outstanding = 365/account receivable turnover (Account receivable turnover is 1,200,000/248,640=4.82) 365/4.82=75.62 Days
Inventory Turnover = COGS/Average inventory 1,056,000/194,880=5.41
Total Asset Turnover = Sales/Average Total Asset = 1,200,000/672,000 = 1.785
Profit Margin = Gross Profit/ Sales *100 = 144,000/1,200,000 *100 = 12% , Net profit/Sales *!00= 6,981/1,200,000 *100 = .58%
Return On Asset = Net Income/Total Asset = 6,981/672,000 = 1.04%
Return On Equity = Net Income / Share holder Equity = 6,981/262,080 = 2.66%
Retrun On Investment Capital = Net Income-Dividend/Total Capital (Total capital is shareholder equity+long term debt =416,640) Net income 6,981 = 6,981/416,640=1.68%
Total Interest earned= EBIT/Total Interest payable = 24,000/12,365 = 1.94
Debt/Total Capital (Debt=long term and short term debt =228480) 228,480/416,640=54%
Please note- As previous year data was not present in average invetory and average total asset the 2014 year's values are uesd.
To calculate total capital long term debt na dshare holder equity is used.
B) Du Pont is basically used to calculate Return On Equity Only. It justs breaks the forumla so that we can see what all part are contributing to the return. It helps us to analyse the company better. As a part of the formula we use Profit Margin, total asset turnover, and equity multiplier to calculate the value
In this case the calculation is as follows (please note we will use the values calculated for the above part, profit margin is net profit)
Equity Multiplier = Total Asset/Total Equity For Firm =672,000/262,080=2.54 . For Industry Equity Multiplier ROE/Profit Margin*Total Asset Turnover .0296/.0055*1.97 = 2.731
C. We can compare the company with industry in terms of Liquidity Ratio solvency ratio, profitability ratio, turnover ratio
In Liquidity: We can see when it comes to current ratio it is close to the industry ratio which shows that it has good number of current ratio excluding cash with itself. Cash is not a big portion of its current ratio which is also one reason why its quick ratio is below the industry average.
In Trunover :
We can see first of all with the turnover in days the company is taking longer time to take money, it shows that they are giving amount for the days which is much more than the industry average of 36 days. Their inventory turnover 5.41 and asset turnover 1.78 is close by to the industy standars. It shows that it is able to generate invetory to cover its COGS and they have healhty churning of total asset as well.
Solvency
In terms of solvency we can see their interest converage is 1.94 which is very less when we compare with the industry average of 3.20. One of the reason is high operating expense, non operating expense (which amounts to nearly 80% of the revenue or EBITA) long days taking to recover money from the creditors. If needed to expand the would require to keep a check on the debt. This is something which is been pointed out at their debt to capital ratio as well which is 58% (please note the debt includes current debt as well) if we remove that it comes to 37%. It is also one of the biggest reason that its RIOC is very poor
Profitabiloty:
In terms of profit the company is perfoming more than decent. It has very good profit margin of .58% ( net profit) when compare to industry, and it is able to provide good return on the equity as well becuase of that 2.63%.
To summarize we can say:
When we see the Dupont we can see having a good ROE becuase of good profit margin channeling to the equity holder, it is unable to break the industry average with good returns only becuase of debt, high expenditure, and poor recovery of money. Although it has a decent churning of assets but the mentioned factors eat away the boost it can get because of good turnover.
Firm Industry Ratio .58%/.0058 .55%/.0055 Profit Margin 1.785 1.97 Total Assets Turnover 2.54 2.731 Equity Multiplier 2.63% 2.96% ROERelated Questions
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