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 $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 RatiosCurrent ratio3.55xFixed assets turnover6.09xDebt-to-capital ratio17.06%Total assets turnover3.80xTimes interest earned9.27xProfit margin4.42%EBITDA coverage11.76xReturn on total assets15.86%Inventory turnover13.33xReturn on common equity22.65%Days sales outstandinga22.6 daysReturn on invested capital20.35%

aCalculation is based on a 365-day year.

Balance Sheet as of December 31, 2016 (Millions of Dollars)Cash and equivalents$32Accounts payable$20Accounts receivables29Other current liabilities13Inventories54Notes payable14Total current assets$115Total current liabilities$47Long-term debt11Total liabilities$58Gross fixed assets92Common stock40Less depreciation27Retained earnings82Net fixed assets$65Total stockholders' equity$122Total assets$180Total liabilities and equity$180

Income Statement for Year Ended December 31, 2016 (Millions of Dollars)Net sales$360.0Cost of goods sold284.4Gross profit$75.6Selling expenses36.0EBITDA$39.6Depreciation expense6.8Earnings before interest and taxes (EBIT)$32.8Interest expense2.3Earnings before taxes (EBT)$30.5Taxes (40%)12.2Net income$18.3

1. Calculate the following ratios. Do not round intermediate steps. Round your answers to two decimal places.FirmIndustry AverageCurrent ratiox3.55xDebt to total capital%17.06%Times interest earnedx9.27xEBITDA coveragex11.76xInventory turnoverx13.33xDays sales outstandingdays22.6daysFixed assets turnoverx6.09xTotal assets turnoverx3.80xProfit margin%4.42%Return on total assets%15.86%Return on common equity%22.65%Return on invested capital%20.35%
2. Construct a DuPont equation for the firm and the industry. Do not round intermediate steps. Round your answers to two decimal places.FirmIndustryProfit margin%4.42%Total assets turnoverx3.80xEquity multiplierxx
3. Do the balance sheet accounts or the income statement figures seem to be primarily responsible for the low profits?
4. -Select-
5. I
6. II
7. III
8. IV
9. V
10. Item 17
12. 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.
13. 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.
14. 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.
15. 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.
16. 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.
18. Which specific accounts seem to be most out of line relative to other firms in the industry?
19. -Select-
20. I
21. II
22. III
23. IV
24. V
25. Item 18
27. 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.
28. 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.
29. 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.
30. 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.
31. 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.
33. 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?
34. -Select-
35. I
36. II
37. III
38. IV
39. V
40. Item 19
42. It is more important to adjust the debt ratio than the inventory turnover ratio to account for any seasonal fluctuations.
43. Seasonal sales patterns would most likely affect the profitability ratios, with little effect on asset management ratios. Rapid growth would not substantially affect your analysis.
44. Rapid growth would most likely affect the coverage ratios, with little effect on asset management ratios. Seasonal sales patterns would not substantially affect your analysis.
45. Seasonal sales patterns would most likely affect the liquidity ratios, with little effect on asset management ratios. Rapid growth would not substantially affect your analysis.
46. If the firm had seasonal sales patterns, or if it grew rapidly during the year, many ratios would most likely be distorted.
49. How might you correct for such potential problems?
50. -Select-
51. I
52. II
53. III
54. IV
55. V
56. Item 20
58. It is possible to correct for such problems by using average rather than end-of-period financial statement information.
59. It is possible to correct for such problems by comparing the calculated ratios to the ratios of firms in a different line of business.
60. It is possible to correct for such problems by comparing the calculated ratios to the ratios of firms in the same industry group over an extended period.
61. There is no need to correct for these potential problems since you are comparing the calculated ratios to the ratios of firms in the same industry group.
62. It is possible to correct for such problems by insuring that all firms in the same industry group are using the same accounting techniques.