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)
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
Lozano Chip Company: Income Statement for Year Ended December 31, 2013 (Thousands of Dollars)
Sales $7,500,000
Cost of goods sold 6,375,000
Selling general and administrative expenses 825,000
Earnings before interest and taxes (EBIT) $ 300,000
Interest expense 111,631
Earnings before taxes (EBT) $ 188,369
Federal and state income taxes (40%) 75,348
Net income $ 113,022
Calculate the indicated ratios for Lozano. Round your answers to two decimal places.
Ratio Lozano Industry Average
Current assets/Current liabilities 2.0
Days sales outstanding* days 35.0 days
COGS/Inventory 6.7
Sales/Fixed assets 12.1
Sales/Total assets 3.0
Net income/Sales % 1.2%
Net income/Total assets % 3.6%
Net income/Common equity % 9.0%
Total debt/Total assets % 30.0%
Total liabilities/Total assets % 60.0%
*Calculation is based on a 365-day year.
Construct the extended Du Pont equation for both Lozano and the industry. Round your answers to two decimal places.
For the firm, ROE is %
For the industry, ROE is %
Outline Lozano's strengths and weaknesses as revealed by your analysis

Answer 1

Answer and Explanation:

The computation of Construction of the extended Du Pont equation for both Lozano and the industry is shown below:-

Current asset ÷ current liability = 2

Days sales outstanding =35 days

Sales ÷ Inventory = 6.67

Sales ÷ Fixed assets = 5.55

Sales ÷ Total assets = 1.754

Net income ÷ Sales = 1.5%

Net income ÷ Total assets = 2.64%

Net income ÷ common equity = 6.45%

Total liabilities ÷ Total assets =59%

b. the computation of firm and industry ROE is shown below:-

Du Pont

Lozano

ROI = [(net profit ÷ sales) × (sales ÷ Total assets)]

= [(113,022 ÷ 7,500,000) × (7,500,000 ÷ 4,275,000)]

= 0.0264

or

= 2.64%

For Industry

ROI = 1.2% × 3

= 0.036

or

= 3.6%

c. Lozano's strengths

1. ROI determined the profit at the time when a firm earned on investing a capital unit

2. Also, the net income or sales figured out the efficiency level so that it could maintain the business affairs

Lozano's Weakness

1.  If we compare the fixed asset turnover with the average of an industry than the investment made in fixed assets would not be a good judgment