Data for Lozano Chip Company and its industry averages follow.
a. Calculate the indicated ratios for Lozano
b. Construct the extended Du Pont equation for both Lozano and the industry.
c. Outline Lozano strengths and weaknesses as revealed by your analysis.
d. Suppose Lozano had doubled its sales as well as its inventories accounts receivable and common equity during 2012. 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).
Lozano Chip Company: Balance Sheet as of December 31 2012 (Thousands of Dollars)
Cash $225000 Accounts payable $601866
Receivables 1575000 Notes payable 326634
Inventories 1125000 Other current liabilities 525000
Total current assets $2950000 Total current liabilities $1453500
Long-term debt 1068750
Net fixed assets 1350000 Common equity 1752750
Total assets $4275000 Total liabilities and equity $4275000
Lozano Chip Company: Income Statement for Year Ended December 31 2012 (Thousands of Dollars)
Sales $7500000
Cost of goods sold 6375000
Selling general and administrative expenses 825000
Earnings before interest and taxes (EBIT) 300000
Interest expense 111631
Earnings before taxes (EBT) 188369
Federal and state income tax (40%) 75348
Net income $113022
Ratio Lozano Industry Average
Current asset/Current liabilities 2.0
Days sales outstanding 35.0 days
Sales/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 liabilities/Total assets 60.0%
*Calculation is based on a 365-day year