FINANCIAL HEALTH ASSESSMENT: BARRY COMPUTER COMPANY – PART 1
MODULE 2 ASSIGNMENT OVERVIEW
In this module, you will complete a two-part Assignment that is submitted over the course of 2 weeks. This week, you will complete and submit Part 1. You will complete and submit Part 2 in Week 5.
For this Assignment, you will act as a consultant hired by the operations director of the Barry Computer Company to do a financial analysis and comparison to the industry. You will conduct a financial ratio analysis to gain a good understanding of the company’s financial performance and will then write up an evaluation of the organization’s financial health, as well as your recommendations for how specific ratios can be improved within the next 3-5 years.
In your report, be sure to include relevant citations from the Learning Resources, the Walden Library, and/or other appropriate academic sources to support your work.
RESOURCES
To prepare for this Assignment:
- Download the Module 2 Assignment Part 1 Template.
- Using problem 4-23 on pages 143-144 of Fundamentals of Financial Management (Brigham & Houston, 2022), populate the Module 2 Assignment Part 1 file with the necessary information. This will assist you as you develop your report. All formulas are included in the Module 2 Assignment Part 1 file.
- Download the Module 2 Assignment Part 2 Template. Note: Be sure to keep a copy of your completed Assignment this week, as you will be adding to the same file for your Week 5 Assignment.
PART 1: FINANCIAL INFORMATION (2-3 PAGES, PLUS EXCEL SPREADSHEET)
- Calculate the following ratios for the Barry Computer Company using the Excel spreadsheet provided.
Ratio | Calculation |
Current | Current Assets / Current Liabilities |
Quick | (Current Assets – Inventories) / Current Liabilities |
Days Sales Outstanding | Receivables / (Annual Sales / 365) |
Inventory Turnover | Sales / Inventories |
Total Assets Turnover | Sales / Total Assets |
Profit Margin | Net Income / Sales |
ROA | Net Income / Total Assets |
ROE | Net Income / Common Equity |
ROIC | EBIT(1-T) / Total Invested Capital |
TIE | EBIT / Interest Charges |
Debt/Total Capital | Total Debt / (Total Debt + Equity) |
M/B | Market Price / Book Value |
P/E | Price per Share / Earnings per Share |
EV/EBITDA | (Market Value of Equity + Market Value of Total Debt + Market Value of Other Financial Claims – Cash and Equivalents) / EBITDA |
- Analyze computations to determine which ratios are above and below their industry averages, and for each, provide a brief explanation as to why that might be the case.
- Evaluate the financial health of the organization, including in what areas the organization could improve.
- Refer to the Week 4 Assignment Rubric for specific grading elements and criteria. Your Instructor will use this grading rubric to assess your work.
Data for Barry Computer Co. and its industry averages follow. The firm’s debt is priced at par, so the market value of its debt equals its book value. Since dollars are in thousands, number of shares are shown in thousands too.
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 2018. 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 Financial Statements (in Thousands of Dollars)
Balance Sheet as of December 31, 2018
Assets | Amount | Liabilities and Equity | Amount |
Current Assets | Current Liabilities | ||
Cash | $77.5 | Accounts Payable | $129 |
Accounts Receivable | $336 | Other Current Liabilities | $117 |
Inventories | $241.5 | Notes Payable to Bank | $84 |
Total Current Assets | $655 | Total Current Liabilities | $330 |
Net Fixed Assets | $292.5 | Long-Term Debt | $256.5 |
Total Assets | $947.5 | Common Equity | $361 |
Common stock (36,100 shares) | |||
Total Liabilities & Equity | $947.5 | Total Liabilities and Equity | $947.5 |
Income Statement for Year Ended December 31, 2018
Item | Amount |
Sales | $1,607.5 |
Cost of Goods Sold | $1,351 |
Materials | $717 |
Labor | $453 |
Heat, Light, and Power | $68 |
Indirect Labor | $113 |
Gross Profit | $256.5 |
Depreciation | $41.5 |
Selling Expenses | $115 |
General and Administrative Expenses | $30 |
Earnings Before Interest and Taxes (EBIT) | $70 |
Solution
Ratio | Calculation | Barry’s Value Calculation | Barry’s Value | Industry Average | Analysis |
Liquidity Ratios | |||||
Current Ratio | Current Assets / Current Liabilities | $655,000 / $330,000 | 1.98 | 2.03 | Barry’s current ratio is slightly below the industry average, indicating a slightly weaker liquidity position. |
Quick Ratio or Acid-Test Ratio | (Current Assets – Inventory) / Current Liabilities | ($655,000 – $241,500) / $330,000 | 1.25 | 1.33 | Barry’s quick ratio is also slightly below the industry average, suggesting a slightly lower ability to cover short-term obligations without relying on inventory. |
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