Data for Lozano Chip Company and its industry averages follow. a. Calculate

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