a. Calculate the indicated ratios for Barry. b. Outline Barry’s strengths and we

Question

a.        Calculate the indicated ratios for Barry.

b.        Outline Barry’s strengths and weaknesses as revealed by your analysis.

c.        What actions could management do to be on par with the industry average?

d.        Suppose Barry had doubled its sales as well as its inventories, accounts receivable, and common equity during 2016. How would that information affect the validity of your ratio analysis?

Ratio

Barry

Industry Average

Current

2.0x

Quick (Acid)

1.3x

Profit Margin

1.20%

Operating Profit Margin

4.00%

ROA

3.60%

ROE

9.00%

ROIC

7.50%

Debt/Total Capital

47.00%

Balance Sheets as of December 31

2016

Assets

Cash and Equivalents

$       77,500

Accounts Receivables

$      336,000

Inventories

$      241,500

Total Current Assets

$      655,000

Net Plant and Equipment

$      292,500

Total Assets

$      947,500

Liabilities and Equity

Accounts Payable

$      129,000

Accruals

$      117,000

Notes Payable

$       84,000

Total Current Liabilities

$      330,000

Long-term bonds

$      256,500

Total Liabilities

$      586,500

Common Equity

$      361,000

Total Liabilities and Equity

$      947,500

Income Statement for Year Ending December 31, 2016

Sales

$                           1,607,500

Operating Costs

$                           1,496,000

Depreciation & Amortization

$                                41,500

EBIT

$                                70,000

Interest

$                                24,500

EBT

$                                45,500

Taxes (40%)

$                                18,200

Net Income

$                                27,300

Ratio

Barry

Industry Average

Current

2.0x

Quick (Acid)

1.3x

Profit Margin

1.20%

Operating Profit Margin

4.00%

ROA

3.60%

ROE

9.00%

ROIC

7.50%

Debt/Total Capital

47.00%

Explanation / Answer

(a) Computation of the ratio for the year 2016.We have,

(b)  The Strengths and weaknesses as revealed by analysis of Berry.We have,

Profitability reflects the final result of business operations.There are two type of profitability ratio.First is profit margin and second is rate of return ratio.

Profit and operating margin measures the efficiency of production as well as pricing.Profit margin and operating profit marging is higher than the industry average. It means company is efficient in making profit in current operation.

Rate of return ratio reflects the relationship between profit and investment like ROA,ROE,ROIC etc. All rate of return ratio are below from industry average.So, earning capacity of firm are low from industry average

Liquidity ratio tells the ability of a firm to meet its obligations in the short run. Here, current asset and quick ratios are less than industry average.So, the firm have problem in meet short-term obligations.

Financial leverage refers to the use of debt finance.Leverage ratios helps assessing the risk arising from the use of debt capital.Here, debt-to-total capital is greater than industry average.So, the firm is in better position in point of view using the debt capital.

(c) The actions could management do to be on par with the industry average.We have,

For the liquidity ratio, firm should increase current asset via increase in sales and reduce current liabilities via reducing accrual and note payable.

For improving rate of return ratio, firm should either increase sale or reducing operating expenses.Due to this operating income and net income increases.

(d)

If 2016, the performance of the firm is below from the industry average.Due to double sales as well as account receivable, inventory and common equity,the ratios for this year will be increased and a comparison between them and industry averages will give positive result to company. Potential investors who look only at 2016 ratios will be misled, and a return to normal conditions in 2015 could hurt the firm's stock price.

Particulars Formula Ratio for Berry Industry Average Difference Current Ratio Current Asset / Current Liabilities 655,000/330,000 1.98 2.0 - 0.02 Quick Ratio (Current Asset - Inventory) / Current Liabilities (655,000 - 241,500) / 330,000 1.25 1.30 - 0.05 Profit Margin Net profit / Net Sales 27,300 / 1,607,500 1.70 % 1.20 % 0.50 % Operating Profit Margin Operating profit / Net Sales 70,000 / 1,607,500 4.35% 4.00 % 0.35 % ROA Net Income / Total Asset 27,300 / 947,500 2.88 % 3.60 % - 0.72 % ROE Net Income / Shareholder Equity 27,300 / 361,000 7.56 % 9.00 % - 1.44 % ROIC EBIT(1-T) / Invested Capital 70,000(1 - 0.40) / (947,500 - 330,000) 6.80 % 7.50 % - 0.70 % Debt/Total Capital Debt / Total Capital 586,500 / 947,000 61.93 % 47.00% 14.93 %

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