DUPONT ANALYSIS A firm has been experiencing low prof tability 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 Fixed assets turnover 1.85% Current retio Debt-to-capital ratio 3.11x 18.95% Total assets turnover 3.03 Times Interest earned 5.52x Profit margin 3.82% EBITDA coverage 8.65% Inventory turnover 11.0ax Days sales outstanding 26.54 days Calculation is based on a 365-cay year. Return on total assets Return on common equity Rotum on invested capital 11.37% 16.38% 14.49 Balance Sheet as of December 31, 2016 (Millions of Dollars) Cash and equivalents Accounts payable $59 Other current liabilities Accounts receivables Inventories 118 Notes payable Total current assets $306 Total current liabilities $133 Lang-term debt Total liabilities $153 Grass fixed assets 241 Cammon stock 113 Less depreciation 55 Retained earnings 226 Nee fixed assets $186 Total stockholders' eculty $339 Total assets 5492 Total liabilities and equity Income Statement for Year Ended December 31, 2016 (Millions of dollars) Net sales $320.0 Cost of goods sold 1:40.6 Gross profit $1.39.4 Selling expenses 57.4 EBITDA $82.0 Depreciation experise 15.6 Earnings before interest and taxes (EBIT) $66.4 Interest expense Earnings before taxes (EBT) $59.3 Taxes (40%) 23.7 Net income $35.6 a. Calculate the following ratios. Do not round intermediate steps. Round your answers to two decimal places. Firm Industry Average Current ratio 3.11x Debt to total capital 18.95% Times interest named 5.52x EBITDA coverage 8.65x Inventory turnover 11.018x Days sales outstanding 26.51deys Fixed assets tumover 4.85% Tatal assets turnover 3.02% 3.82% Profit margin Return on total assets 11.87% Return on common equity 16.38% Return on invested capital 14.499 b. Construct a DuPont equation for the firm and the industry. Do not round intermediate steps. Raund your answers to two decimal places. Firm Industry Profit margin 3.82% Tatal assets turnover 3.DK Equity multilier c. Do the balance sheet accounts or the income statement figures seem to be primarily responsible for the low profits? 1. 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. 11. The low ROE for the firm is due to the fact that the firm is uitzing more debt than the average firm in the Industry and the low ROA is mainly a result of an excess Investment in assets. Cl. The low ROE for the firm is due to the res that the firm is wulizing less debt than the average firm in the industry and the low ROA is mainly a result of an lower than everage investment in assets. IV. Analysis af the extended Du Pont equation and the set af ratios shows that the turnover ratio of sales ta assets is quite low; however, its profit margin compares favarably 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. V. Analysis of the extended Du Pont equation and the set of ralios 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 fimm is carrying less asscts than it needs to support its salcs. d. Which specific accounts seem to be most aut af line relative to other firms in the industry? 1. The accounts which seem to be most out of line include the following ratios: Inventory Turnaver, Days Sales Outstanding, Tatal Asset Tumover, Return an Assets, and Return an Equity. Jl. The accounts which seem to be most out of line include the following ratios: Current, EBITDA Coverage, Inventory Turnover, Days Sales Outstanding, and Retum on Equity. [11. 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. IV. The accounts which seem to be most out of line include the following ratios: Times Interest Earned, Total Asset Turnaver, Frafit Margin, Return on Assets, and Return on Equity. V. 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 c. If the firm had a pronounced seasonal sales pattern or if it grow rapidly during the year, how might that affect the validity of your ratio analysis IV 1. If the film had seasonal sales pattems, or if it grew rapidly during the year, many ratios would most likely be distorted. 11. It is more important to adjust the debt ratio than the inventory turnover ratio to account for any seasonal fluctuations. III. Seasonal sales patters would most likely affect the prafitability ratios, with little effect on asset management ratias. Rapid growth would nat substantially affect your analysis. IV. 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. V. Seasonal sales patterns would most likely affect the liquidity ratios, with little effect on esset management ratios. Rapid growth would not substantially affect your analysis. How might you correct for such potential problems? 1. It is possible to correct for such problems by comparing the calculated ratios to the ratios affirms in a different line of business. 11. It is possible to correct for such problems by comparing the calculated ratios to the ratio of fins in the same industry group over an extended period CII. 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. IV. It is possible to correct for such problems by insuring that all firms in the same industry group are using the same accounting techniques. V. It is possible to correct for such problems by using average rather than end of period financial statement Information, DUPONT ANALYSIS A firm has been experiencing low prof tability 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 Fixed assets turnover 1.85% Current retio Debt-to-capital ratio 3.11x 18.95% Total assets turnover 3.03 Times Interest earned 5.52x Profit margin 3.82% EBITDA coverage 8.65% Inventory turnover 11.0ax Days sales outstanding 26.54 days Calculation is based on a 365-cay year. Return on total assets Return on common equity Rotum on invested capital 11.37% 16.38% 14.49 Balance Sheet as of December 31, 2016 (Millions of Dollars) Cash and equivalents Accounts payable $59 Other current liabilities Accounts receivables Inventories 118 Notes payable Total current assets $306 Total current liabilities $133 Lang-term debt Total liabilities $153 Grass fixed assets 241 Cammon stock 113 Less depreciation 55 Retained earnings 226 Nee fixed assets $186 Total stockholders' eculty $339 Total assets 5492 Total liabilities and equity Income Statement for Year Ended December 31, 2016 (Millions of dollars) Net sales $320.0 Cost of goods sold 1:40.6 Gross profit $1.39.4 Selling expenses 57.4 EBITDA $82.0 Depreciation experise 15.6 Earnings before interest and taxes (EBIT) $66.4 Interest expense Earnings before taxes (EBT) $59.3 Taxes (40%) 23.7 Net income $35.6 a. Calculate the following ratios. Do not round intermediate steps. Round your answers to two decimal places. Firm Industry Average Current ratio 3.11x Debt to total capital 18.95% Times interest named 5.52x EBITDA coverage 8.65x Inventory turnover 11.018x Days sales outstanding 26.51deys Fixed assets tumover 4.85% Tatal assets turnover 3.02% 3.82% Profit margin Return on total assets 11.87% Return on common equity 16.38% Return on invested capital 14.499 b. Construct a DuPont equation for the firm and the industry. Do not round intermediate steps. Raund your answers to two decimal places. Firm Industry Profit margin 3.82% Tatal assets turnover 3.DK Equity multilier c. Do the balance sheet accounts or the income statement figures seem to be primarily responsible for the low profits? 1. 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. 11. The low ROE for the firm is due to the fact that the firm is uitzing more debt than the average firm in the Industry and the low ROA is mainly a result of an excess Investment in assets. Cl. The low ROE for the firm is due to the res that the firm is wulizing less debt than the average firm in the industry and the low ROA is mainly a result of an lower than everage investment in assets. IV. Analysis af the extended Du Pont equation and the set af ratios shows that the turnover ratio of sales ta assets is quite low; however, its profit margin compares favarably 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. V. Analysis of the extended Du Pont equation and the set of ralios 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 fimm is carrying less asscts than it needs to support its salcs. d. Which specific accounts seem to be most aut af line relative to other firms in the industry? 1. The accounts which seem to be most out of line include the following ratios: Inventory Turnaver, Days Sales Outstanding, Tatal Asset Tumover, Return an Assets, and Return an Equity. Jl. The accounts which seem to be most out of line include the following ratios: Current, EBITDA Coverage, Inventory Turnover, Days Sales Outstanding, and Retum on Equity. [11. 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. IV. The accounts which seem to be most out of line include the following ratios: Times Interest Earned, Total Asset Turnaver, Frafit Margin, Return on Assets, and Return on Equity. V. 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 c. If the firm had a pronounced seasonal sales pattern or if it grow rapidly during the year, how might that affect the validity of your ratio analysis IV 1. If the film had seasonal sales pattems, or if it grew rapidly during the year, many ratios would most likely be distorted. 11. It is more important to adjust the debt ratio than the inventory turnover ratio to account for any seasonal fluctuations. III. Seasonal sales patters would most likely affect the prafitability ratios, with little effect on asset management ratias. Rapid growth would nat substantially affect your analysis. IV. 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. V. Seasonal sales patterns would most likely affect the liquidity ratios, with little effect on esset management ratios. Rapid growth would not substantially affect your analysis. How might you correct for such potential problems? 1. It is possible to correct for such problems by comparing the calculated ratios to the ratios affirms in a different line of business. 11. It is possible to correct for such problems by comparing the calculated ratios to the ratio of fins in the same industry group over an extended period CII. 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. IV. It is possible to correct for such problems by insuring that all firms in the same industry group are using the same accounting techniques. V. It is possible to correct for such problems by using average rather than end of period financial statement Information