6x 4x Ch 04: End-of-Chapter Problems - Analysis of Financial Statements A firm has been experiencing low profitability in recent years. Perform an analysis of the firm's financial position using the DuPont equation. The fir has no lease payments but has a $1 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 2x Fixed assets turnover Debt-to-capital ratio 21% Total assets turnover Times interest earned 4x Profit margin 3.25% EBITDA coverage 8x Return on total assets 13.00% Inventory turnover 15x Return on common 18.30% equity Days sales 18days Return on invested 16.70% outstanding capital Calculation is based on a 365-day year. Balance Sheet as of December 31, 2019 (Millions of dollars) Cash and equivalents $ 55 Accounts payable $.41 Accounts receivables Other current liabilities 24 Inventories 104 Notes payable 38 Total current assets $211 Total current liabilities $103 Long-term debt 21 Total liabilities $124 Gross fixed assets 159 Common stock 76 Less depreciation 25 Retained earnings 145 Net fixed assets $134 Total stockholders' equity $221 Total assets $345 Total liabilities and equity $345 52 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 62.50 EBITDA $ 52.50 Depreciation expense 10.00 Earnings before interest and taxes (EBIT) $ 42.50 Interest expense 5.50 Earnings before taxes (EBT) $ 37.00 Taxes (25%) 9.25 Net income 27.75 a. Calculate the following ratios. Do not round intermediate calculations. Round your answers to two decimal places. Firm Industry Average Current ratio X 2x Debt to total capital % 21% Times interest earned 4x EBITDA coverage 8x Inventory turnover 15X Days sales outstanding days 18days Fixed assets turnover X 6x Total assets turnover 4x Profit margin % 3.25% Return on total assets % 13.00% Return on common equity % 18.30% x x X Ch 04: End-of-Chapter Problems - Analysis of Financial Statements Fixed assets turnover X 6x Total assets turnover X 4x Profit margin % 3.25% Return on total assets % 13.00% Return on common equity % 18.30% Return on invested capital % 16.70% 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 % 3.25% Total assets turnover X 4x Equity multiplier x c. Do the balance sheet accounts or the income statement figures seem to be primarily responsible for the low profits? 1. 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