A firm has been experiencing low profitability in recent years. Perform an analysis of the firm’s financial position using the extended Du Pont equation. The firm has no lease payments, but has a $2 million sinking fund payment on its debt. The most recent industry average ratios and the firm’s financial statements are as follows: a. Calculate those ratios that you think would be useful in this analysis. 

b. Construct an extended Du Pont equation, and compare the company’s ratios to the industry average ratios. 

c. Do the balance sheet accounts or the income statement figures seem to be primarily responsible for the low profits? 

d. Which specific accounts seem to be most out of line relative to other firms in the industry? 

e. If the firm had a pronounced seasonal sales pattern, or if it grew rapidly during the year, how might that affect the validity of your ratio analysis? How might you cor rect for such potential problems? 

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Industry Average Ratios Current ratio Debt/total assets Times interest earned EBITDA coverage Inventory turnover Days sales outstanding* * Calculation is based on a 365-day year. Gross fixed assets Less depreciation Net fixed assets Balance Sheet as of December 31, 2005 (Millions of Dollars) Cash and equivalents $ 78 66 Net receivables Inventories 159 Total current assets $303 Total assets 2x 30% 7x 9X 10x 24 days Net sales Cost of goods sold Gross profit Selling expenses EBITDA 225 78 $147 $450 Fixed assets turnover Total assets turnover Profit margin on sales Return on total assets Return on common equity Depreciation expense Earnings before interest and taxes (EBIT) Interest expense Earnings before taxes (EBT) Taxes (40%) Net income Accounts payable Notes payable Other current liabilities Income Statement for Year Ended December 31, 2005 (Millions of Dollars) Total current liabilities Long-term debt Total liabilities Common stock Retained earnings Total stockholders' equity Total liabilities and equity $795.0 660.0 $135.0 73.5 $61.5 12.0 $ 49.5 4.5 $45.0 18.0 $27.0 6X 3x 3% 9% 12.9% $ 45 45 21 $111 24 $135 114 201 $315 $450