Its initial inventory level is $375,000, and it will raise funds as additional notes payable and use them to increase inventory. How much can its short-term debt (notes payable) increase without pushing its current ratio below 2.0?
The analysis reveals that while Barry’s liquidity is well within the industry standards, it is not collecting on its receivables efficiently. Most companies have a 30 day payment policy and the industry standard here is 35 days. It is taking Barry over twice that amount of time to collect. This presents a negative indication of the way the firm is being managed, one that is confirmed by the total assets turnover margin; it is half of the number which is standard for the industry. This means that sales are not what they should be. The management issues presented here also explain why, although Barry’s net profit margin is slightly higher than other companies in the industry, its return on assets and return on equity are significantly under the standards. The Extended Du Pont confirms this conclusion. Barry’s strengths are in its profit margin and liquidity; but if it doesn’t get its A/R collections on track and increase sales, its weaknesses could become overpowering.
Had Barry Computer doubled its sales, inventories, A/R, and common equity during 2005, the affect on this ratio analysis would be mixed. Doubling the company’s sales is not effective if Barry is not collecting on its receivables. If its customers are having difficulty paying their bills, Barry may not get paid at all. Accordingly, having more sales and product, as well as more A/R, will only positively impact Barry if management succeeds in collecting the money owed the company. If Barry was able to double the indicated categories without additional debt, then the debt-to-assets would improve beyond industry standards and, presumptively, the ROA and ROE would increase to a point closer to industry levels. Again,