4-24 DUPONT ANALYSIS A firm has been experiencing low profitability in recent years. Per- form 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 Fixed assets turnover 6x Current ratio 3x Debt-to-capital ratio 20% Times interest earned 7x EBITDA coverage 9X Inventory turnover 10x Days sales outstanding 24 days * Calculation is based on a 365-day year. Total assets turnover Profit margin Return on total assets Return on common equity Return on invested capital 3x 3% 9% 12.86% 11.50% Balance Sheet as of December 31, 2015 (Millions of Dollars) $ 78 $ 45 66 11 Cash and equivalents Accounts receivable Inventories Total current assets 29 159 $303 Accounts payable Other current liabilities Notes payable Total current liabilities Long-term debt Total liabilities $ 85 50 $135 225 114 78 201 Gross fixed assets Less depreciation Net fixed assets Total assets Common stock Retained earnings Total stockholders' equity Total liabilities and equity $147 $315 $450 $450 Income Statement for Year Ended December 31, 2015 (Millions of Dollars) Net sales $795.0 Cost of goods sold 660.0 Gross profit $135.0 Selling expenses 73.5 EBITDA $ 61.5 Depreciation expense 12.0 Earnings before interest and taxes (EBIT) $ 49.5 Interest expense 4.5 Earnings before taxes (EBT) $ 45.0 Taxes (40%) 18.0 Net income $ 27.0 a. Calculate the ratios you think would useful in this analysis. b. Construct a DuPont equation, and compare the company's ratios to the industry average ratios. 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? 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 correct for such potential problems? C. e