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 $2\backslash$times Fixed assets turnover $5\backslash$times

Debt$-$to$-$capital ratio $17\%$ Total assets turnover $3\backslash$times

Times interest earned $5\backslash$times Profit margin $2\mathrm{.}25\%$

EBITDA coverage $6\backslash$times Return on total assets $6\mathrm{.}75\%$

Inventory turnover $11\backslash$times Return on common equity $15\mathrm{.}00\%$

Days sales outstandinga $16$ days Return on invested capital $12\mathrm{.}40\%$

aCalculation is based on a $365-$day year.

Balance Sheet as of December $31,2021($millions of dollars$)$

Cash and equivalents $ $70$ Accounts payable $ $40$

Accounts receivables $57$ Other current liabilities $31$

Inventories $136$ Notes payable $40$

Total current assets $ $263$ Total current liabilities $ $111$

Long$-$term debt $22$

Total liabilities $ $133$

Gross fixed assets $220$ Common stock $123$

Less depreciation $43$ Retained earnings $184$

Net fixed assets $ $177$ Total stockholders' equity $ $307$

Total assets $ $440$ Total liabilities and equity $ $440$

Income Statement for Year Ended December $31,2021($millions of dollars$)$

Net sales $ $845\mathrm{.}00$

Cost of goods sold $730\mathrm{.}00$

Gross profit $ $115\mathrm{.}00$

Selling expenses $62\mathrm{.}50$

EBITDA $ $52\mathrm{.}50$

Depreciation expense $10\mathrm{.}00$

Earnings before interest and taxes $($EBIT$)$ $ $42\mathrm{.}50$

Interest expense $5\mathrm{.}50$

Earnings before taxes $($EBT$)$ $ $37\mathrm{.}00$

Taxes $(25\%)9\mathrm{.}25$

Net income $ $27\mathrm{.}75$

Calculate the following ratios. Do not round intermediate calculations. Round your answers to two decimal places.

Firm Industry Average

Current ratio

$\backslash$times $2\backslash$times

Debt to total capital

$\%17\%$

Times interest earned

$\backslash$times $5\backslash$times

EBITDA coverage

$\backslash$times $6\backslash$times

Inventory turnover

$\backslash$times $11\backslash$times

Days sales outstanding

days $16$ days

Fixed assets turnover

$\backslash$times $5\backslash$times

Total assets turnover

$\backslash$times $3\backslash$times

Profit margin

$\%2\mathrm{.}25\%$

Return on total assets

$\%6\mathrm{.}75\%$

Return on common equity

$\%15\mathrm{.}00\%$

Return on invested capital

$\%12\mathrm{.}40\%$

Construct a DuPont equation, and the industry. Do not round intermediate calculations. Round your answers to two decimal places.

Firm Industry

Profit margin

$\%2\mathrm{.}25\%$

Total assets turnover

$\backslash$times $3\backslash$times

Equity multiplier

$\backslash$times

$\backslash$times

Do the balance sheet accounts or the income statement figures seem to be primarily responsible for the low profits?Which specific accounts seem to be most out of line relative to other firms in the industry?

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.

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.

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.

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.

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.

$-$Select$-$

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?

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.

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.

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.

If the firm had sharp seasonal sales patterns, or if it grew rapidly during the year, many ratios would most likely be distorted.

It is more important to adjust the debt ratio than the inventory turnover ratio to account for any seasonal fluctuations.

How might you correct for such potential problems?