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 $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 3.49x Fixed assets turnover 5.50x Debt-to-capital ratio 19.43% Total assets turnover 2.93x Times interest earned 11.09x Profit margin 9.46% EBITDA coverage 11.50x Return on total assets 28.85% Return on common equity 44.53% Inventory turnover 11.02x Days sales outstandinga 26.88 days Calculation is based on a 365-day year. Return on invested capital 37.62% Balance Sheet as of December 31, 2016 (Millions of Dollars) Cash and equivalents Accounts payable $38 29 Accounts receivables Other current liabilities Inventories 61 Notes payable Total current assets $128 Total current liabilities Long-term debt Total liabilities Gross fixed assets Common stock Less depreciation 26 Retained earnings 79 $64 Total stockholders' equity $129 Net fixed assets Total assets $192 Total liabilities and equity $192 Income Statement for Year Ended December 31, 2016 (Millions of Dollars) Net sales $320.0 Cost of goods sold 224.0 Gross profit $96.0 Selling expenses 32.0 EBITDA $64.0 Depreciation expense 3.2 Earnings before interest and taxes (EBIT) $60.8 Interest expense 3.4 Earnings before taxes (EBT) $57.4 Taxes (40%) 23.0 Net income $34.4 a. Calculate the following ratios. Do not round intermediate steps. Round your answers to two decimal places. Firm Industry Average Current ratio 3.49x Debt to total capital 19.43% Times interest earned 11.09x EBITDA coverage 11.50x Inventory turnover 11.02x Days sales outstanding days 26.88days Fixed assets turnover 5.50x Total assets turnover 2.93x Profit margin 9.46% Profit margin 9.46% Return on total assets 28.85% Return on common equity 44.53% Return on invested capital 37.62% 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 9.46% Total assets turnover 2.93x Equity multiplier c. Do the balance sheet accounts or the income statement figures seem to be primarily responsible for the low profits? -Select- I. 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. II. 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. III. 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. IV. 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. V. 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. d. Which specific accounts seem to be most out of line relative to other firms in the industry? -Select- I. 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. II. 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. III. 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. IV. 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. s Interest Earned, Total Asset Turnover, Profit Margin, Return on Assets, 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. V. 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. 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 $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 3.49x Fixed assets turnover 5.50x Debt-to-capital ratio 19.43% Total assets turnover 2.93x Times interest earned 11.09x Profit margin 9.46% EBITDA coverage 11.50x Return on total assets 28.85% Return on common equity 44.53% Inventory turnover 11.02x Days sales outstandinga 26.88 days Calculation is based on a 365-day year. Return on invested capital 37.62% Balance Sheet as of December 31, 2016 (Millions of Dollars) Cash and equivalents Accounts payable $38 29 Accounts receivables Other current liabilities Inventories 61 Notes payable Total current assets $128 Total current liabilities Long-term debt Total liabilities Gross fixed assets Common stock Less depreciation 26 Retained earnings 79 $64 Total stockholders' equity $129 Net fixed assets Total assets $192 Total liabilities and equity $192 Income Statement for Year Ended December 31, 2016 (Millions of Dollars) Net sales $320.0 Cost of goods sold 224.0 Gross profit $96.0 Selling expenses 32.0 EBITDA $64.0 Depreciation expense 3.2 Earnings before interest and taxes (EBIT) $60.8 Interest expense 3.4 Earnings before taxes (EBT) $57.4 Taxes (40%) 23.0 Net income $34.4 a. Calculate the following ratios. Do not round intermediate steps. Round your answers to two decimal places. Firm Industry Average Current ratio 3.49x Debt to total capital 19.43% Times interest earned 11.09x EBITDA coverage 11.50x Inventory turnover 11.02x Days sales outstanding days 26.88days Fixed assets turnover 5.50x Total assets turnover 2.93x Profit margin 9.46% Profit margin 9.46% Return on total assets 28.85% Return on common equity 44.53% Return on invested capital 37.62% 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 9.46% Total assets turnover 2.93x Equity multiplier c. Do the balance sheet accounts or the income statement figures seem to be primarily responsible for the low profits? -Select- I. 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. II. 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. III. 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. IV. 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. V. 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. d. Which specific accounts seem to be most out of line relative to other firms in the industry? -Select- I. 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. II. 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. III. 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. IV. 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. s Interest Earned, Total Asset Turnover, Profit Margin, Return on Assets, 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. V. 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