18 % - 66 A firm has been experiencing low profitability in recent years. Perform an analysis of the firm's financial position using the DuPont 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: Industry Average Ratios Current ratio Fixed assets turnover 6x Debt-to-capital ratio Total assets turnover 3 x Times interest 4x Profit margin 3.50% earned EBITDA coverage Return on total 10.50% assets Inventory turnover 10 x Return on common 14.30% equity Days sales 26 days Return on invested 13.30 % outstandinga capital a Calculation is based on a 365-day year. Balance Sheet as of December 31, 2019 (Millions of Dollars) Cash and equivalents $ 74 Accounts payable $ 48 Accounts receivables 70 Other current liabilities 22 Inventories 148 Notes payable Total current assets $ 292 Total current liabilities $ 114 Long-term debt 22 Total liabilities $ 136 Gross fixed assets Common stock 100 Less depreciation 70 Retained earnings 199 Net fixed assets $ 143 Total stockholders' equity $ 299 Total assets Total liabilities and equity $ 435 44 213 $ 435 Income Statement for Year Ended December 31, 2019 (Millions of Dollars) Net sales 745.00 Cost of goods sold 630.00 Gross profit 115.00 Selling expenses 64.50 EBITDA 50.50 Depreciation expense 10.00 Earnings before interest and taxes (EBIT) 40.50 Interest expense 5.50 Earnings before taxes (EBT) 35.00 Taxes (25%) 8.75 Net income 26.25 days a. Calculate the following ratios. Do not round intermediate calculations. Round your answers to two decimal places. Firm Industry Average Current ratio Debt to total capital 18% Times interest earned EBITDA coverage Inventory turnover 10 x Days sales outstanding 26 days Fixed assets turnover 6 x Total assets turnover Profit margin 3.50% Return on total assets 10.50% Return on common equity 14.30 % Return on invested capital 13.30% b. Construct a DuPont equation for the firm and the industry. Do not round intermediate calculations. Round your answers to two decimal places. Firm Industry. Profit margin 3.50% 3x Total assets turnover 3x Equity multiplier c. Do the balance sheet accounts or the income statement figures seem to be primarily responsible for the low profits? I. Analysis of the extended Du Pont equation and the set of ratios shows that the turnover ratio of sales to assets is quite low; however, its profit margin compares favorably with the industry average. Either sales should be lower given the present level of assets, or the firm is carrying less assets than it needs to support its sales. II. Analysis of the extended Du Pont equation and the set of ratios shows that most of the Asset Management ratios are below the averages. Either assets should be higher given the present level of sales, or the firm is carrying less assets than it needs to support its sales. III. The low ROE for the firm is due to the fact that the firm is utilizing more debt than the average firm in the industry and the low ROA is mainly a result of an excess investment in assets. IV. The low ROE for the firm is due to the fact that the firm is utilizing less debt than the average firm in the industry and the low ROA is mainly a result of an lower than average investment in assets. V. Analysis of the extended Du Pont equation and the set of ratios shows that the turnover ratio of sales to assets is quite low; however, its profit margin compares favorably with the industry average. Either sales should be higher given the present level of assets, or the firm is carrying more assets than it needs to support its sales. -Select- d. Which specific accounts seem to be most out of line relative to other firms in the industry? I. The accounts which seem to be most out of line include the following ratios: Times Interest Earned, Total Asset Turnover, Profit Margin, Return on Assets, and Return on Equity. II. The accounts which seem to be most out of line include the following ratios: Inventory Turnover, Days Sales Outstanding, Fixed Asset Turnover, Profit Margin, and Return on Equity. III. The accounts which seem to be most out of line include the following ratios: Inventory Turnover, Days Sales Outstanding, Total Asset Turnover, Return on Assets, and Return on Equity. IV. The accounts which seem to be most out of line include the following ratios: Current, EBITDA Coverage, Inventory Turnover, Days Sales Outstanding, and Return on Equity. V. The accounts which seem to be most out of line include the following ratios: Debt to Total Capital, Inventory Turnover, Total Asset Turnover, Return on Assets, and Profit Margin. -Select- 18 % - 66 A firm has been experiencing low profitability in recent years. Perform an analysis of the firm's financial position using the DuPont 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: Industry Average Ratios Current ratio Fixed assets turnover 6x Debt-to-capital ratio Total assets turnover 3 x Times interest 4x Profit margin 3.50% earned EBITDA coverage Return on total 10.50% assets Inventory turnover 10 x Return on common 14.30% equity Days sales 26 days Return on invested 13.30 % outstandinga capital a Calculation is based on a 365-day year. Balance Sheet as of December 31, 2019 (Millions of Dollars) Cash and equivalents $ 74 Accounts payable $ 48 Accounts receivables 70 Other current liabilities 22 Inventories 148 Notes payable Total current assets $ 292 Total current liabilities $ 114 Long-term debt 22 Total liabilities $ 136 Gross fixed assets Common stock 100 Less depreciation 70 Retained earnings 199 Net fixed assets $ 143 Total stockholders' equity $ 299 Total assets Total liabilities and equity $ 435 44 213 $ 435 Income Statement for Year Ended December 31, 2019 (Millions of Dollars) Net sales 745.00 Cost of goods sold 630.00 Gross profit 115.00 Selling expenses 64.50 EBITDA 50.50 Depreciation expense 10.00 Earnings before interest and taxes (EBIT) 40.50 Interest expense 5.50 Earnings before taxes (EBT) 35.00 Taxes (25%) 8.75 Net income 26.25 days a. Calculate the following ratios. Do not round intermediate calculations. Round your answers to two decimal places. Firm Industry Average Current ratio Debt to total capital 18% Times interest earned EBITDA coverage Inventory turnover 10 x Days sales outstanding 26 days Fixed assets turnover 6 x Total assets turnover Profit margin 3.50% Return on total assets 10.50% Return on common equity 14.30 % Return on invested capital 13.30% b. Construct a DuPont equation for the firm and the industry. Do not round intermediate calculations. Round your answers to two decimal places. Firm Industry. Profit margin 3.50% 3x Total assets turnover 3x Equity multiplier c. Do the balance sheet accounts or the income statement figures seem to be primarily responsible for the low profits? I. Analysis of the extended Du Pont equation and the set of ratios shows that the turnover ratio of sales to assets is quite low; however, its profit margin compares favorably with the industry average. Either sales should be lower given the present level of assets, or the firm is carrying less assets than it needs to support its sales. II. Analysis of the extended Du Pont equation and the set of ratios shows that most of the Asset Management ratios are below the averages. Either assets should be higher given the present level of sales, or the firm is carrying less assets than it needs to support its sales. III. The low ROE for the firm is due to the fact that the firm is utilizing more debt than the average firm in the industry and the low ROA is mainly a result of an excess investment in assets. IV. The low ROE for the firm is due to the fact that the firm is utilizing less debt than the average firm in the industry and the low ROA is mainly a result of an lower than average investment in assets. V. Analysis of the extended Du Pont equation and the set of ratios shows that the turnover ratio of sales to assets is quite low; however, its profit margin compares favorably with the industry average. Either sales should be higher given the present level of assets, or the firm is carrying more assets than it needs to support its sales. -Select- d. Which specific accounts seem to be most out of line relative to other firms in the industry? I. The accounts which seem to be most out of line include the following ratios: Times Interest Earned, Total Asset Turnover, Profit Margin, Return on Assets, and Return on Equity. II. The accounts which seem to be most out of line include the following ratios: Inventory Turnover, Days Sales Outstanding, Fixed Asset Turnover, Profit Margin, and Return on Equity. III. The accounts which seem to be most out of line include the following ratios: Inventory Turnover, Days Sales Outstanding, Total Asset Turnover, Return on Assets, and Return on Equity. IV. The accounts which seem to be most out of line include the following ratios: Current, EBITDA Coverage, Inventory Turnover, Days Sales Outstanding, and Return on Equity. V. The accounts which seem to be most out of line include the following ratios: Debt to Total Capital, Inventory Turnover, Total Asset Turnover, Return on Assets, and Profit Margin. -Select