Click here to read the eBook: Potential Misuses of Roe DUPONT ANALYSIS 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 Ratios Current ratio 4.38x Fixed assets turnover 6.23x Debt-to-capital ratio 19.64% Tatal assets turnover 3.13x 4.75% Profit margin Return on total assets 14.04% Times interest eamed 7.12x EBITDA coverage 11.18x Inventory turnover 9.79x Days sales outstandinga 28.73 days Calculation is based on a 365-day year. Return on common equity 20.86% Return on invested capital 17.85% Balance Sheet as of December 31, 2016 (Millions of Dollars) , () Cash and equivalents $100 Accounts payable $45 Accounts receivables 89 Other current liabilities 28 Inventories 190 Notes payable 56 Total current assets $379 Total current liabilities $129 Long-term debt 39 Total liabilities $168 Gross fixed assets 257 Common stock 145 Less depreciation 78 Retained earnings 245 Net fixed assets $179 Total stockholders' equity $390 Total assets $558 Total liabilities and equity $558 Income Statement for Year Ended December 31, 2016 (Millions of Dollars) Net sales $930.0 Cost of goods sold 753.3 Gross profit $176.7 Selling expenses 74.4 EBITDA $102.3 Depreciation expense 12.1 Earnings before interest and taxes (EBIT) $90.2 Interest expense 7.6 Earnings before taxes (EBT) $82.6 Taxes (40%) 33.0 Net income $49.6 a. Calculate the following ratios. Do not round intermediate steps. Round your answers to two decimal places. Firm Industry Average Current ratio X X 4.38x % 19.64% Debt to total capital Times interest earned 7.12x EBITDA coverage X 11.18x Inventory turnover 9.79x Days sales outstanding days 28.73days Fixed assets turnover X 6.23x Total assets turnover 3.13x Profit margin % 4.75% Return on total assets % 14.04% Return on common equity % 20.86% Return on invested capital % 17.85% Return on invested capital % 17.85% b. 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 % 4.75% Total assets turnover 3.13x Equity multiplier X c. Do the balance sheet accounts or the income statement figures seem to be primarily responsible for the low profits? -Select- I. 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. II. 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 III. 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. IV. 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. V. 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. d. Which specific accounts seem to be most out of line relative to other firms in the industry? -Select- 1. The accounts which seem to be most out of line include the following ratios: Debt to Total Capital, Inventory Tumover, Total Asset Turnover, Retum on Assets, and Profit Margin. II. 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. III. 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 Retum on Equity. IV. 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. V. 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. e. 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? -Select- I. 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. II. 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. III. 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. IV. If the firm had seasonal sales patterns, or if it grew rapidly during the year, many ratios would most likely be distorted. V. 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? -Select- I. It is possible to correct for such problems by Insuring that all firms in the same industry group are using the same accounting techniques. II. It is possible to correct for such problems by using average rather than end-of-period financial statement information. III. It is possible to correct for such problems by comparing the calculated ratios to the ratios of firms in a different line of business. IV. 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