Question
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
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 $3 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 | 4.03x | Fixed assets turnover | 6.00x | |
Debt-to-capital ratio | 18.18% | Total assets turnover | 3.07x | |
Times interest earned | 8.80x | Profit margin | 5.73% | |
EBITDA coverage | 7.80x | Return on total assets | 16.43% | |
Inventory turnover | 10.43x | Return on common equity | 23.04% | |
Days sales outstandinga | 26.44 days | Return on invested capital | 20.98% |
aCalculation is based on a 365-day year.
Balance Sheet as of December 31, 2016 (Millions of Dollars) | ||||
Cash and equivalents | $43 | Accounts payable | $19 | |
Accounts receivables | 32 | Other current liabilities | 4 | |
Inventories | 69 | Notes payable | 22 | |
Total current assets | $144 | Total current liabilities | $45 | |
Long-term debt | 13 | |||
Total liabilities | $58 | |||
Gross fixed assets | 99 | Common stock | 52 | |
Less depreciation | 27 | Retained earnings | 106 | |
Net fixed assets | $72 | Total stockholders' equity | $158 | |
Total assets | $216 | Total liabilities and equity | $216 |
Income Statement for Year Ended December 31, 2016 (Millions of Dollars) | |
Net sales | $360.0 |
Cost of goods sold | 280.8 |
Gross profit | $79.2 |
Selling expenses | 28.8 |
EBITDA | $50.4 |
Depreciation expense | 9.0 |
Earnings before interest and taxes (EBIT) | $41.4 |
Interest expense | 3.2 |
Earnings before taxes (EBT) | $38.2 |
Taxes (40%) | 15.3 |
Net income | $22.9 |
Calculate the following ratios. Do not round intermediate steps. Round your answers to two decimal places.
Firm | Industry Average | |
Current ratio | x | 4.03x |
Debt to total capital | % | 18.18% |
Times interest earned | x | 8.80x |
EBITDA coverage | x | 7.80x |
Inventory turnover | x | 10.43x |
Days sales outstanding | days | 26.44days |
Fixed assets turnover | x | 6.00x |
Total assets turnover | x | 3.07x |
Profit margin | % | 5.73% |
Return on total assets | % | 16.43% |
Return on common equity | % | 23.04% |
Return on invested capital | % | 20.98% |
Construct a DuPont equation for the firm and the industry. Do not round intermediate steps. Round your answers to two decimal places.
Firm | Industry | |
Profit margin | % | 5.73% |
Total assets turnover | x | 3.07x |
Equity multiplier | x | x |
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