Analysis of Financial Statements: Tying the Ratios Together

The DuPont equation shows the relationships among asset management, debt management, and

profitability

ratios. Management can use the DuPont equation to analyze ways of improving the firm's performance. Its equation is:

Ratio analysis is important to understand and interpret financial statements; however, sound financial analysis involves more than just calculating and interpreting numbers.

Quantitative

factors also need to be considered.

Quantitative Problem: Rosnan Industries' $2020$ and $2019$ balance sheets and income statements are shown below.

Balance Sheets

$20202019$

Assets

Cash and equivalents $$80$ $$65$

Accounts receivable $275300$

Inventories $375350$

Total current assets $$730$ $$715$

Net plant and equipment $2,0001,490$

Total assets $$2,730$ $$2,205$

Liabilities and Equity

Accounts payable $$150$ $$85$

Accruals $7550$

Notes payable $130155$

Total current liabilities $$355$ $$290$

Long$-$term debt $450290$

Total liabilities $$805$ $$580$

Common stock $1,2251,225$

Retained earnings $700400$

Total common equity $$1,925$ $$1,625$

Total liabilities and equity $$2,730$ $$2,205$

Income Statements

$20202019$

Sales $$2,000$ $$1,500$

Operating costs excluding depreciation and amortization $1,2501,000$

EBITDA $$750$ $$500$

Depreciation and amortization $10075$

EBIT $$650$ $$425$

Interest $6245$

EBT $$588$ $$380$

Taxes $(40\%)235152$

Net income $$353$ $$228$

Dividends paid $$53$ $$48$

Addition to retained earnings $$300$ $$180$

Shares outstanding $100100$

Price $$25\mathrm{.}00$ $$22\mathrm{.}50$

WACC $10\mathrm{.}00\%$

What is the firm$$s $2020$ current ratio? Do not round intermediate calculations. Round your answer to two decimal places.

If the industry average debt$-$to$-$assets ratio is $30\%,$ then Rosnan$$s creditors have a

$-$Select$-$

cushion than indicated by the industry average.

What is the firm$$s $2020$ net profit margin? Do not round intermediate calculations. Round your answer to two decimal places.

$\%$

If the industry average profit margin is $12\%,$ then Rosnan$$s lower than average debt$-$to$-$assets ratio might be one reason for its high profit margin.

$-$Select$-$

What is the firm$$s $2020$ price$/$earnings ratio? Do not round intermediate calculations. Round your answer to two decimal places.

Using the DuPont equation, what is the firm$$s $2020$ ROE? Do not round intermediate calculations. Round your answer to two decimal places.

$\%$